Ratten & Anor v Ultra Motorhomes International Ltd & Anor

This is an application by the current supervisors of the company voluntary arrangement (“the CVA”) of Ultra Motorhomes International Ltd (“TJMIL”). The present applicants were substituted as claimants in place of the original supervisor (Mr Derek Oakley) by a consent order made on 9 August 2005. They seek a declaration that they are entitled to possession of what has become known in the proceedings as Vehicle 48 and an order for its delivery up. Directions are also sought for the assessment of damages consequent upon the removal of Vehicle 48 from the jurisdiction in April 2004 by the second Respondent Behike Electronic GMBh (“Behlke”).

Vehicle 48 is what is described as a Super Nova 1000S, It is a very large type of motor home built on a Volvo coach chassis with an interior that is custom designed and built to the purchaser’s requirements.

Behike resists the claim on the basis of an agreement (“the Security Agreement”) contained in a letter from Ultra Vehicle Design Limited (“UVDL”) to Behlke dated 21 March 2003 and signed on behalf of UVDL by Dr Gideon Helmers and on behalf of Behike by Mr Frank Behike, its managing director. At the time of the agreement UVDL was the wholly owned subsidiary of UMIL and had succeeded to its business and assets under a variation of the CVA which took effect in December 2002. I will come to the background circumstances and the terms of this shortly.

The agreed translation of the Security Agreement is in these terms:

“Dear Sirs

Re: Transfer of Ownership of a Vehicle as Security

SUPER NOVA 1000S

Chassis No.: YV31MA7151A052864 Commission No.: 482864.03

Official Licence Plate: CX52 WDE

The above-mentioned vehicle is extensively described in the related documentation which is available to you.

We are hereby transferring ownershzp of this vehicle to you

as security for aprepayment for commission 47,0700,02 to the amount of /126.000.00 (one hundred and twenty-six thousand Euro). We expressly confirm that this motor vehicle is our sole

property and that it is free of any and all entitlements whatsoever

of third parties. This also relates to all components of the vehicle. This declaration of assignment will be valid irrevocably until the point in time at which commission 47,0700.02 of Behlke Electronic GmbH has been delivered properly to it. Behike Electronics GmbH commits itself to return the Vehicle Document U5W~ No. 1864710 as well as this pledge of security against the successful handover of the new vehicle for Behlke Electronic GmbH.

We would be thankful to you ifyou could sign and return the enclosed copy of this letter to us.

Yours sincerely, ULTRA Vehicle Design Ltd. [Signature]

Dr. G. Helmers”

The reference in the Security Agreement to commission 47.0700.02 is to an order placed with UMIL by Behike on 7 February 2002 for another Super Nova 1000S which I will refer to as Vehicle 47. This was to be a laboratory and demonstration vehicle. The contract price was €552,030 payable in four instalments: 30% on the placing of the order; 25% in week 12; a further 25% in week 20; and the final instalment of 20% on delivery in week 30. The final instalment was also conditional upon Vehicle 47 having been tested and having been accepted by Behike.

It is common ground that the delivery date and payment schedule for Vehicle 47 were not adhered to and that by March 2003 the vehicle was not complete. By then only the first three instalments of the purchase price had been paid. In order to fund the completion of the vehicle Dr Helmers requested payment of the final instalment prior to delivery. Behlke agreed to make the € 126k available but only on the terms set out in the Security Agreement.

On 2 July 2003 both UIMIL and UVDL were placed into liquidation on the application of the supervisors following the failure of the CVA. Vehicle 47 was not by then complete, but was recovered from the liquidators and was completed at Behike’s expense. It is said that the cost of completing the vehicle was some €3 19,093. Behike contends that Vehicle 48 was effectively transferred to it as security for the completion of Vehicle 47 and that it is entitled to sell the vehicle and to retain from the proceeds of sale a sum equal to the costs and other expenses incurred as a result of IJMIL’s failure to complete Vehicle 47 in accordance with the contract of 7 February 2002. The claimant’s case is that ownership of Vehicle 48 was never transferred from UMIL to UVDL under the hive-down arrangements between the companies in December 2002 and that the Security Agreement is not in any event enforceable against either IJIMIL or UVDL.

In order to understand the issues about ownership and enforceability it is necessary to begin with the history and terms of the CVA and the sale and purchase agreement under which the assets and undertaking of LTMIL came to be transferred to UVDL,

UMIL was incorporated on 14 April 2000 and began trading in September of that year. In its first year of trading it made a loss of £349,000 and on 11 December 2001 it entered into the CVA approved by its creditors based on a proposal dated 21 November 2001. The proposal was drafted by the corporate recovery department of Tenon Ltd (trading as Tenon Recovery) with the benefit of input from Ms Susan Whitter, the sole director of UMIL. Ms Whitter had various discussions with Mr Michael Hall of Tenon and the proposal as drafted provided for TJMIL to continue to trade in order to maximise realisations from which it was estimated that a payment to creditors of loop in the £ could be made. The company was to pay the supervisors the sum of £33,000 within 30 days of the approval of the CVA and a further sum of £10,833 on 28 December 2001 and at the end of each month of the arrangement period for a further 36 months, Clause 8.3 of the proposal made provision for further payments in the event that the net profit of the company exceeded £130k in any 12 month period. Clause 4.5 of the proposal stated that:

“In the event that the Company defaults for more than 3 consecutive months in payment of the payment on account of Profit Contribution under paragraph 8.2 or shall be at any time in arrears in aggregate more than the amount of 3 months contributions then unless the Supervisor shall conclude that there is a reasonable prospect of the Company bringing such payments up to date the Supervisor will forthwith take such steps as shall be necessary to sell the business of the Company as a going concern or alternatively shall realise the assets and the Company will concur, and will procure that the directors will concur, in such sale and the net proceeds of sale shall thereon comprise part of the Arrangement funds for the purposes of the arrangement.”

The proposal envisaged that upon approval of the CVA there would be new investment in UMIL of up to £400,000 in the form of assets and cash to assist with future trading. The essence of the proposal was that this money would be used to fund the future business of the company and not to pay existing creditors. Their claims would be met out of future income. The property of the company included in the arrangement is defined in the proposal as “the Assets” and ci. 6 of the proposal was in these terms:

“6.1

The Arrangement funds shall be the Assets but subject as herein before provided such that Assets will only include the proceeds of disposal of the business if the Company shall be in default of its proposed Profit contributions. In the event that the Company complies with its obligations in respect of profit contributions, the Arrangement shall comprise only such contributions together with the proceeds of the Disposal Properties and the disposal ofplant and machinery and the book debt collections.

6.2

All other assets of the Company are, for the avoidance of doubt, excluded assets,

6.3

In consideration of the Creditors’ agreement to the Arrangement the Arrangement funds and all of the Company ‘s legal and beneficial interest in the Assets and all sums realised in respect of the Assets shall from the Commencement Date be held by the Company in trust. The trustee shall be the Supervisor. The beneficiaries shall be all of the Creditors, The terms of the trust shall be all relevant terms of this Proposal. If required to do so by the Supervisor the Company shall execute a written declaration of trust on the above terms. In the event (as described in 6.1) that the Company complies with its obligations in respect of Profit Contributions the balance of the Assets shall revert to the Company at the conclusion of the Arrangement.”

The proposal also contains detailed provisions setting out the functions and powers of the supervisors under the CVA and the obligations and powers of UMIL during the period of the arrangement. As one would expect, under a trading proposal of this kind, the Supervisors’ principal functions include the receipt of the profit contributions payable under ci. 4 (where it occurs) the realisation of the assets and receipt of the proceeds of sale; the investigation of the company’s affairs and the general supervision of T.JMIL’s compliance with the terms of the CVA. For these purposes, the Supervisor is given (cl.11) as agent of the company the power to sell assets and a general power to “do all things necessary for the management of the affairs, business and property of the Company and for the realisation of the property of the Company and for its distribution in accordance with the terms of the Arrangement”.

The Company for its part undertook (under cl 12) to procure that its offices and employees would (inter alia) co-operate, deliver monthly management accounts within 30 days of each month end; ensure that the assets or their proceeds were paid to the Supervisors immediately after receipt by the Company or its agents; and conduct the business of the Company in accordance with the terms of the CVA in a manner likely to enhance the sovereignty of the Company.

Paragraph 14 specifically provided that:

“14.1

The Company shall remain solely responsible for the conduct of any future trading of its business. Neither the Nominee nor the Supervisor shall have any personal liability in respect of any such activities or any debts incurred in respect of such trading

14.2

The Company shall be entitled to incur credit from suppliers on normal trade terms for the purpose of carrying on its business under the Arrangement. The Company will continue trading for the duration of the Arrangement meeting its day-to-day liabilities as and when they fall due.

14.3

The Company shall not give any security of any sort for any borrowingi ncurred during the Arrangement Period without the prior written approval of the Supervisor.”

Clauses 20 and 21 of the proposal deal with default and the termination of the CVA. An event of default includes any failure by UMIL to comply with the terms of the CVA which the Supervisor in his sole discretion considers to be material (ci 20.1). If an event of default occurs, then the Supervisor “shall” terminate the arrangement and petition for the administration or winding up of the Company (ci 21.1).

The Company failed to make the monthly contributions provided for under ci 8 of the CVA and on 2 December 2002 Mr Oakley gave notice to creditors of a meeting to be held on 20 December at which an amendment to the terms of the CVA would be considered. Mr Ratten explains in his witness statement that cash flow had not improved and that the view of Ms Whitter was that UMIL was failing to attract new business because it was (to use her word) “tainted” by the CVA. By then the Company had made only ten payments to the Supervisor amounting in total to £119,664 but Mr Oakley continued to believe that its core business remained sound and was income-producing.

He therefore proposed a variation to the CVA under which the Company’s failure to make all the payments required under paragraph 8.1 would not be treated as an event of default and UMIL would recommence payment with effect from January 2003. In addition to the monthly payments of £10,833 it would also pay the arrears for September and December 2002 in a single lump sum within three years of 11 December 2001: i.e. by the end of the 36 month period contemplated by the original proposal.

To counter the apparent effect of the CVA on the business of UMIL the Company was to be authorised to transfer its business and undertaking to a wholly owned subsidiary (UVDL) on terms which would require UVDL to make the monthly payments to the Supervisor and to pay off the arrears by 11 December 2004. A breach of the revised obligations would constitute an event of default.

These amendments to the CVA were approved by creditors at the meeting on 20 December 2002 and the documents necessary to give effect to the revised arrangement were executed that day. The transfer to UVDL of UMIL’s assets and undertaking was effected by an agreement under seal between the two companies (“the Sale Agreement”) which the Supervisors rely upon in support of their contention that UVDL never required title to Vehicle 48.

Clause 2.1 of the Sale Agreement provides for the sale to UVDL of various assets of UMIL including what are defined as “the Equipment” (cl 2.1.1); the “Stock” (ci 2.1.2); and “the Contracts” (ci 2.1.3).

The Contracts are the contracts, orders and engagements of the business entered into by UIMIL and therefore include the order for Vehicle 47 placed in January 2002. Clause 9.1 further provides that:

“The Purchaser acknowledges that the Vendor may not be entitled to assign, and will not be entitled to novate, the contractual benefit or burden of the Contracts and to that extent does not purport to do so. It can only, and will, for a period of 2 months from the Transfer Date, use every reasonable effort to co-operate with the Purchaser in trying to persuade the other parties to any Contract to have it assigned or novated to the Purchaser, although it is agreed and understood that the Vendor will have little or no influence with such other parties and will be under no obligation to make any payments directly or indirectly to such other parties to persuade them as aforesaid.”

“Equipment” includes:

“all plant, machinery, furniture, equl~ment, tools and other chattel assets (but excluding any motor vehicles) of the Vendor situated on the Premises at the Transfer Date.”

“Stock” includes:

“all stock in trade, raw materials and work in progress of the Vendor which are situated on the Premises or on the premises of third parties at the Transfer Date.”

Clause 2.2 of the Sale Agreement qualifies ci 2.1 by excluding from the sale various items including in ci 2.2.9 “any motor vehicles”.

Clause 5.1 of the Sale Agreement also provides that:

“Property to any right title or interest in any of the Assets shall pass to the Purchaser only upon payment in full being made for the respective assets pursuant to Clause 4.”

Clause 3 of the Sale Agreement provides that:

“3.1

The consideration for the sale and purchase referred to in Clause 2 shall be such sum as will be equal to the aggregate of the following

3.1.1

the sum of £303,324, together with

3.1.2

The Earn Out ¶ any),

And the consideration shall be paid in accordance with the provisions of clause 4.”

The figure of £303,324 is a calculation of the ci 8.1 payments due over the balance of the 36 month period together with the arrears. The Earn Out is the right to additional payments out of profits in excess of £130k in any one year.

In the 12 months following the execution of the Sale Agreement only two further payments were made. The first was a payment of £10,883 on 23 April 2003. The second was a further payment of £43,332 made on 19 May 2003, On 3 April 2003 Ms Whitter was warned that she was about to receive a letter from the Supervisor demanding payment of the arrears. Her response (in an email to Mr Shaw of Tenon) was to welcome the move as it would enable her to reinforce the position to Dr Helmers “who needs to be under no illusion as to what will happen if we don’t succeed in our current endeavours,” She went on to tell Mr Shaw that she had met him (Dr Helmers) that morning and that there was likely to be a proposal made to the Supervisor of a single payment of six months’ contributions out of the proceeds of what is described as “our stock vehicle” which she expected to be able to make by the end of May followed by a further single six months’ payment in October funded from trading. The reference to the stock vehicle is a reference to Vehicle 48.

In fact, by then the Security Agreement had already been entered into and no further monthly payments were made. A meeting of creditors was called and UMIL and UVDL were placed into Creditors Voluntary liquidation on 2 July 2003.

The Security Agreement is on its face an agreement between UVDL and Behike. Mr Behike’s evidence is that he never appreciated the distinction between IJMIL and UVDL or that they were separate companies. He said that he regarded the business or company run by Dr Helmer simply as “Ultra”. But for the security agreement to have any effect at all it has to have been entered into with either 1.HvIIL or UVDL because they (or rather one or other of them) were the only legal entities able at the time to create any interest in Vehicle 48. No one suggests that the vehicle belonged to Dr Helmers himself.

Behlke’s pleaded case (see para 12 of its Defence) is that at the time of the Security Agreement Vehicle 48 was the property of UMIL and that UVDL andlor Dr Helmers had the actual or ostensible authority of UMIL to act on its behalf in procuring the funds necessary for it to finish Vehicle 47 and to grant security over Vehicle 48 for that purpose.

I shall come shortly to the question of who was the contracting party and the related question of authority, but the first issue to determine has to be which company had title to Vehicle 48 as at the date of the Security Agreement. Although some reservations were originally expressed about this it is now common ground that Vehicle 48 was the property of UMIL in December 2001 and became an asset of that company subject to the trust in favour of the creditors pursuant to ci 6.3 of the CVA proposal. It is also common ground that this trust has survived the liquidation of the company.

The real issues about title stem from the Sale Agreement, The Supervisors take two points: (1) that Vehicle 48 fell within the reference to “any motor vehicles” in ci 2.2.9 of the Sale Agreement and was therefore excluded from the sale of assets to UVDL; and (2) that if included in the sale Vehicle 48 was subject to the retention of title provisions contained in ci 5.1 with the result that title never passed to I.J\TDL. Behlke disputes the first proposition but accepts that ci 5.1 does apply. It differs, however, from the Supervisors in its construction of that clause and contends that the reference to payment in full is a reference to the instalments due under ci 8 of the CVA as amended being up to date as at the relevant date of transfer. I will deal with these two issues in turn,

The Supervisors’ stance on the first issue has changed during the course of these proceedings. As Ms Muth pointed out, Mr Oakley in his second witness statement (made in connection with the preliminary issue on the applicability of German law to the Security Agreement) expressly contended that Vehicle 48 passed to UVDL as “stock” having been completed during 2002. He went on to reject its inclusion as a “motor vehicle” under cl 2.2.9 saying that this was in his experience a standard form provision designed to protect vehicles used by employees of the vendor company from being transferred inadvertently to the purchaser. His contention was that Vehicle 48 was indeed part of the stock of UMIL in December 2002 and was one of the only tangible and valuable assets of the company. The intention must have been to pass it to UVDL so that it could be sold as part of an ongoing business for the benefit of creditors subject of course to the protection afforded by the retention of title cause.

Clearly, Vehicle 48 is a motor vehicle. It was also part of UMIL’s stock in trade. The evidence is that the vehicle was created as a demonstration vehicle but was always available for sale. The real issue therefore is whether the reference to “any motor vehicles” in ci 2.2.9 is wide enough to include any and all motor vehicles or must be given some narrower construction and meaning.

The provisions of cl 2 of the Sale Agreement are on one view ambiguous and must in my judgment be given construction which facilitates rather than impedes the purpose of the revisions to the CVA. This approach to construction was adopted by Blackburne J in the reported case of Re Brelec Installations [2000] - where he said this:

“An arrangement is usually put together in some haste. Mod~flcations to it are frequently made at the statutory meeting of creditors with little time to reflect on how they relate to the other terms of the debtor’s proposal. Quite often, as this case demonstrates, the resulting terms are clumsily worded. The arrangement ought therefore to be construed in a practical fashion. Otherwise there is a risk that careless drafting coupled with a too-literal approach to its construction will serve to frustrate rather than achieve the purpose of the arrangement.”

It is clear that the transfer of assets to UVDL was intended to allow the business formally carried on by T.JMIL to continue in the hands of its new subsidiary which was to obtain the benefit of LTMIL’s existing contracts and the equipment, stock and goodwill of that business. Motor vehicles are also excluded from the definition of “equipment” but that adds nothing to nor does it alter the relevant background to construing the agreement. It seems to me that it would be odd for the draftsman to have included the benefit of contracts for the manufacture and sale of the motor homes (e.g Vehicle 47) but to have excluded title to a similar motor home already completed and available for sale. I am much more impressed by Mr Oakley’s evidence that the exclusion of motor vehicles is a standard type of provision designed to exclude from the sale vehicles supplied for the use of the vendor’s own employees. That construction preserves the apparent commercial thinking behind the sale agreement whilst retaining assets which do not have to pass in order for that to be achieved. In my judgment Vehicle 48 did pass to UVDL as stock subject only to the retention of title clause.

The next issue is how that clause should be construed. It is common ground for the reasons already outlined that there was not payment in full for the respective assets pursuant to ci 4 of the Sale Agreement if that means if all of the instalments of the consideration have to be paid before title can pass. The £54,165 paid by 19 May 2003 meant that each of the monthly instalments of £10,833 up to the end of March 2003 were met but only late. The total amount paid by way of instalments since the commencement of the CVA (f 173,829) was also insufficient to cover the value placed on Vehicle 48 as of March 2003 in these proceedings.

Ms Muth contended that for the revised arrangement to work it could not have been the parties’ intention that title to one of the vehicles manufactured and sold by UVDL should only pass to the purchaser if all of the instalments of consideration came eventually to be paid. This would have the consequence that a purchaser would have to wait for up to two years before his title was confirmed. This lack of certainty would make trade difficult if not impossible.

The scheme of the original CVA clearly envisaged that UMIL would be able to continue to trade and that existing creditors would be provided for and paid off through the monthly instalments of profit paid to the Supervisor by the company out of its receipts. This is confirmed by cis 4.1 and 14.1 of the proposal. The company is required by ci 12.1.6 to conduct trading in accordance with the terms of the arrangement and by ci 8 to remit to the Supervisor the monthly payments of £10,833 and any further share of profits payable under ci 8.3. His functions during the continuation of the arrangement are limited to banking and distributing the funds payable to creditors and supervising the company’s compliance with the terms of the arrangement: see ci 10. Both ci 10.1 and 11.2 give to the Supervisor power to realise the Assets as defined but this power of realisation is directed to the position following a breakdown in the payment schedule when the Supervisor is empowered under ci 4.5 to sell the business as a going concern or to realise the assets.

UMIL therefore remained free to dispose of the vehicles in the ordinary course of its business. The proceeds of sale would be used to meet the costs of the business (see ci 4.1) and the payments due under ci 8. The trust in favour of creditors which attaches to the assets that are subject to the arrangement does not prevent sales of the vehicles in the ordinary course of business but attaches to the proceeds of sale: see ci 6.1.

Under these arrangements there are no provisions for retention of title pending payment. The proceeds of sale of a vehicle once credited to the company are subjected to the trust and the provisions of the CVA which bind and regulate the relationship between UMIL, its Supervisor and its creditors. But the variation to these arrangements was effected by a sale of assets between UMIL and UVDL to which the Supervisor was not a party and which was intended to vest the trading assets in a company that was unaffected by the CVA.

The sale agreement was completed on 20 December 2002 and the consideration was payable on deferred terms to T.JMIL. The obligations of UVDL under the sale agreement were secured not by it entering into any direct contractual relationship with the Supervisor, but by the grant of a debenture over its assets in favour of UMIL. UVDL was therefore never a party to this CVA and was not bound by the terms of the original arrangement. Its title to and right to deal with the assets transferred to it depend exclusively on the terms of the sale agreement and this therefore is the only means of legal control over its use and disposition of the assets which provided the sole means of paying off the pre-arrangement creditors of UMIL.

In these circumstances it is hardly surprising that those responsible for drafting the sale agreement thought it necessary to include the retention of title provisions contained in cl 5.1. They were clearly intended to reinforce payment provisions contained in ci 4. UVDL was given possession of the movable assets on completion of the sale agreement (see ci 4.4) but no right to pass title before “payment in full” for the respective assets was made pursuant to ci 4.

It seems to me that this must mean payment in full of all sums due under ci 4. The sale agreement is drafted as a single sale of au the Assets listed in ci 2.1. The consideration for that sale is a single sum of~E303,324 together with the Earn-Out (as defined) if applicable. Separate values are not attributed to individual assets and the consideration is stated to be payable in accordance with ci 4 which sets out the regime of monthly payments corresponding to those contained in ci 8 of the original arrangement. The reference in ci 5.1 to payment being made in full pursuant to cl 4 must have been intended to mean payment of all sums due under that clause.

I therefore reject Ms Muth’s submission that I should construe the condition in ci 5.1 as satisfied by the payment of the monthly instalments up to the end of March 2003. The effect of ci 5.1 was that UVDL could not pass title to the purchaser of a vehicle prior to all instalments of consideration being paid unless it obtained a consent or release from UMIL which of course remained subject to the Supervisor under the CVA. In this way, UMIL (and through it the Supervisor) could decide whether to grant a release and so exercise a degree of control and supervision over the disposal of UVDL’s assets. This seems to me to be a perfectly reasonable and intelligible system of control and not one which in any way flouts business commonsense or is inconsistent with the overall scheme and purpose of the hive-down arrangements.

The consequence of all this is that ci 5.1 applied as of 21 March 2003 so as to prevent TJVDL from passing a good title to Vehicle 48 otherwise than with the consent of UMIL. The Supervisors therefore contend that the Security Agreement was ineffective to pass to Behlke title to Vehicle 48 whether by way of security or otherwise,

This argument has to be broken down into a number of sub-issues:

The identification of the parties to a written agreement is normally contained in the agreement itself. In this case, the agreement was negotiated between Dr Helmers and Mr Behlke and then committed to writing in the form of a letter in the name of UVDL. The letter contains statements that “we are transferring the ownership of this vehicle to you” and “we expressly confirm that this motor vehicle is our sole property”. In the context of the letter the “we” is obviously a reference to UVDL. Mr Behlke says that he did not pay any real attention to the UVDL name but concentrated on the word Ultra. But that seems to me to be irrelevant. Subject to the cl.5. 1 rights of UMIL, LTVDL was the purchaser of the assets and the company which was to continue to run UMIL’s business. It had acquired under the sale agreement the benefit of the contract for the purchase of Vehicle 47 and the security agreement was designed to provide security for the advance payment of the final instalment due under that contract. There is nothing in the relevant background circumstances to displace the language used in the letter and the identification of UVDL as the contracting party.

The matter is however complicated by the fact that the agreement was signed on behalf of UVDL by Dr Helmers. Dr Heimers was not a director of either UMIL or UVDL but the manager of its business. It is not in dispute that he was responsible for acquiring and negotiating the terms of the orders for vehicles and dealt personally with Mr Behlke in relation to his order for Vehicle 47. He had the technical expertise to deal with the production of the vehicles. Ms Whitter, by contrast, was an accountant and auditor whose principal responsibility was to manage the finances of the two companies and to liaise with the Supervisor in relation to the CVA.

The Supervisors’ position is that in the light of cl 5.1 of the sale agreement they do not need to challenge Dr Heimers’ authority to enter into the security agreement on behalf of UVDL. Even if binding on the company, it is of no effect. Behlke, by contrast, contends not only that Dr Helmers was authorised to enter into the security agreement by UVDL but that he did so with the actual or implied authority of UMIL and that by implication UMIL must be taken to have waived or released their rights over Vehicle 48 under ci 5.1 of the sale agreement.

Mr Behlke accepted that he had never met or had any dealings with Ms Whitter before 24 April 2003. There is therefore no question of Dr Helmers having been held out expressly to Mr Behlke as having the necessary authority to bind either UMIL or UVDL to the security agreement by some representation made to him by Ms Whitter prior to the making of the security agreement. Behlke’s case therefore is that Dr Helmers either had actual authority from Ms Whitter to enter into the agreement or had apparent authority as a result of being allowed by Ms Whitter to act in the conduct of the company’s business so as to appear to have the authority necessary to bind the principal.

In his witness statement Dr Helmers describes himself as the de facto managing director of UMIL and UVDL. He started the business in 1994 and says that following the CVA he continued to be in charge of the business and to be regarded by customers as the person who was running it. Ms Whitter allowed him to do this and to negotiate and finalise contracts with customers which he would sign on the company’s behalf.

Dr Helmers accepts in his witness statement that the contract for Vehicle 47 and the security agreement were entered into by different companies but describes it as a paper exercise. UMIL and UVDL were regarded, he says, as the same entity and the security agreement was intended to be an extension of the sale contract in respect of Vehicle 47. He says that he did not differentiate in his mind between UMIL and UVDL when entering into the security agreement and that he regarded himself as having the full authority of UMIL and UDVL to do so. In terms of actual authority from Ms Whitter he says (in paragraph 26 of his witness statement) that he acted with her full knowledge and authority at all times. He says that prior to entering into the agreement he consulted her and that she confirmed that “bearing in mind the intent of the company (I.JVDL) to provide Behlke with a valid and enforceable security, that UVDL should issue it”.

In his oral evidence he said that she had no objection to the security agreement and told him to go ahead and do it. He was given the keys and log book to Vehicle 48 and therefore had physical control of it.

The Supervisors challenged this evidence but Ms Whitter was not called as a witness and I have no evidence from her to contradict what Dr Helmers has said. I should however make it clear that I have considerable doubts about parts of his evidence in reiation (eg) to whether Mr Behike was aware of the CVA. He was forced to concede that he had written letters at the time which contained statements he knew to be inaccurate or untrue and which contradict the evidence he has given in these proceedings. I therefore approach his evidence with considerable caution, particularly bearing in mind that the Supervisors are not in the position to challenge much of it.

It seems to me that Ms Whitter obviously did allow Dr Heimers to run the technical side of the business and to continue to do so even after the change to UVDL. This appears to have included the making of contracts for the production and sale of vehicles. There is no evidence to suggest that he did not have actual authority to do this or that Ms Whitter was as a matter of practice required to countersign any contract he entered into. His custody of the keys to Vehicle 48 is consistent with this. Everything points to his having actual authority to take the orders and to fulfil them on behalf of the company.

I am however much less convinced that Dr Heimers had actual authority to enter into the security agreement. This was very much a one-off arrangement designed to boost the cash flow position of UVDL in relation to the completion of the contract for Vehicle 47. It is not in any sense a usual type of contract and would not in my judgment fall within the scope of a general authority to enter into contracts for the production and sale of vehicles. Nor would it have been within the scope of his apparent authority based on his role in the management of the business. An agreement to give security for a contract is something which in the context of this business required board approval. I therefore take the view that the security agreement is only binding on UVDL if Dr Helmers was given express authority by Ms Whitter to enter into it on the company’s behalf.

I have considerable misgivings about accepting this evidence. It is unsupported by any evidence from Ms Whitter and is also inconsistent with the way in which one would expect her to act in the circumstances, The giving of security over a valuable asset of the company is something which one would have expected her to refer to the Supervisor. ci 14.3 of the original CVA prohibits the giving of security without the prior written approval of the Supervisor. This was not, of course, a term of the sale agreement and is not contractually binding on UVDL but the grant of security preventing the sale of Vehicle 48 is something which stood outside the normal trading arrangements contemplated by the sale agreement and the absence of any reference to the Supervisor casts considerable doubt in my view on the evidence which Dr Heimers has given about this. On balance I am not persuaded that any such express consent was given.

Ms Muth contends that a release by UMIL should be implied in order to give effect to the terms of the security agreement. But that is the same argument which underlies her approach to the construction of ci 5.1 which I have rejected. The release of the cl 5.1 rights is something which goes to the heart of the CVA and requires a judgment to be made by UMIL in consultation with the Supervisor as to whether the return justifies the release in the interests of the creditors. Quite apart from ci 14.3 itself, I doubt whether UMIL’s power to continue trading enabled it to give security for its obligations. But even if it had power to do so, it was required under cl 12.1.6 to conduct its business in accordance with the terms of the CVA and in a manner likely to enhance its own solvency and to produce the maximum dividend for creditors. These were matters which Ms Whitter would have been required to give specific consideration to before consenting to the security arrangements. There is no evidence that she did so and no consent can in the circumstances be implied. It follows in my judgment that there was no waiver or release of UMIL’s cl 5.1 rights as part of the security agreement entered into by UVDL. In these circumstances it is unnecessary for me to determine the precise scope of ci 14.3 of the CVA or whether Mr Behike had notice of the CVA at the time of the security agreement. The potentially interesting question of whether it would have been in some way ultra vires for UMIL to have entered into the security agreement, or to have authorised Dr Helmers to do so on its behalf do not arise.

That leaves the question of the effectiveness and enforceability of the security agreement itself. These questions are governed by German law. In his report Professor Dr Koch notes that the security agreement describes itself as a Sicherheitsubereignung des Fahrzeugs. A Sicherheitsubereignung des Fahrzeugs is recognised by German law as a special form of transfer of ownership for security purposes which has developed outside the provisions of the Civil Code. It constitutes a full transfer of title without an actual transfer of possession and has wideiy replaced pledges as a form of security for movable property. As a matter of law, it therefore requires the debtor to own or to have a power of disposal over the object at the time of the security transfer. This is dealt with in detail in paragraph 1.3.3 of the expert’s opinion. Lack of ownership or a power of disposal by the grantor of the security renders the transfer ineffective and this can only be overcome by what is described as a bona fide acquisition of title in accordance with paragraphs 932 and 933 BGB. Professor Koch goes on to conclude that this is not relevant to the present case because there was no voluntary handing over of Vehicle 48 in the sense prescribed by 933 BGB and Behike has abandoned its defence based on these provisions of the Civil Code.

In the light of my conclusion that I.JVDL had no title to Vehicle 48 by reason of cl 5.1 of the sale agreement it follows from Professor Koch’s report that the security agreement was ineffective and the Supervisors are therefore entitled to an order for the delivery up of the vehicle and to an assessment of any damages suffered by its removal and retention by Behike. In these circumstances it is unnecessary and I prefer not to express any view about the scope of the security agreement which the expert has expressed no very clear conclusions. I do wish, however, to deal very shortly with the further argument of the Supervisors that the security agreement (even if otherwise valid and enforceable) is void against the liquidators and creditors of UVDL for non-registration under sections 395 and 396 of the Companies Act 1985.

Section 395 makes any charge void against the liquidator and any creditor of the grantor company so far as any security on the company’s property is confirmed by the charge unless it is registered within 21 days of its creation. The charges to which s.395 applies are set out in s.396(1) and include:

“(c)

a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale,”

‘Charge’ includes mortgage: see s.396 (4).

The Supervisors’ contention is that the Security Agreement falls within s.396 (1) (c) because it would (if made by an individual) have constituted a bill of sale of personal chattels registrabie under the Bills of Sale Act 1878. Section 4 of that Act defines a bill of sale as including assignments or transfers of chattels as security for a debt or any instrument by which any charge or security on the chattel is conferred. Ms Muth, I think, accepts that the first part of this is wide enough to include the security agreement in this case but she contends that the agreement did not create a charge over Vehicle 48 and that it was not therefore registrabie under s.396(1)(c): see Stoneleigh Finance Ltd v Philips [1965] 2QB 537.

It is not intended that the form of security created by the Security Agreement does not fall within the definition of a charge in s.396(1) simply because the proper law of the instrument was German law. In Re Weldtech Equipment [1991] BCLC 393 Hoffmann J held that s.395 applies to all charges created by companies registered in England whatever may be the proper law of the instrument creating the charge. The oniy issue therefore is whether the Sicherheitsubereignung des Fahrzeugs created by the security agreement would be recognised as having the essential characteristics of a charge as defined in s.396. The argument that the security agreement did not create a charge within the meaning of s.396 seems to turn on whether it confirmed a right to possession of Vehicle 48. Professor Koch describes the Sicherheitsubereignung des Fahrzeugs as a form of security which transfers title but not possession although the security agreement itself contemplates that possession of Vehicle 48 would be handed over. It is therefore said to differ from a charge which confers neither any property in nor a right to possession of the goods that are charged: see Fisher and Lightwood’s Law of Mortgage (11th edition) paragraph 1.5.

But even if the security agreement did not create a charge properly so called, it did create a security interest equivalent to a mortgage. It purported to confer on B an interest in Vehicle 48 as security and the grant of a right to possession is consistent with that and a feature of many mortgages unless excluded. A mortgage of a chattel such as Vehicle 48 would be registrable as a bill of sale because it confers a right of security in the goods. It is also registrable under s.395 because it fails within the wider definition of a charge as including a mortgage. It is therefore void and unenforceable against the liquidator and creditors of UVDL (or for that matter UMIL) for non-registration even if otherwise a valid and enforceable security.