Lexi Holdings (In Administration) v Pannone and Partners

There are before me two cross-applications for summary judgment and/or striking out of parts of the statements of case in a claim by Lexi Holdings Plc (In Administration) against its former solicitors Pannone and Partners. Both applications sought to take advantage of the jurisdiction under CPR Part 24.1 to decide, not merely a claim, but also a particular issue arising in proceedings, without a trial. Neither side suggests that its application, even if successful, would obviate the need for a trial, but both parties were at the outset in broad agreement that the court’s decision on the issues in respect of which summary judgment is sought would be of assistance in the economic disposal of the case in accordance with the overriding objective. In the event, I doubt whether any such economy has been achieved.

For reasons which I shall explain in due course, the hearing of these applications was interrupted by a lengthy adjournment, during the course of which Pannone decided not to proceed with its application. It remains live therefore only in relation to costs. During the same adjournment both sides launched, and then abandoned, further cross-applications for summary judgment or strike out, in relation to the issue whether Lexi’s claim is barred by the principle ex turpi causa non oritur actio (“the illegality principle”). Again, they remain live only in relation to costs. Finally, Pannone also applied for an order that the illegality issue be determined as a preliminary issue. That application stands adjourned while the parties plead their respective cases in relation to that issue. In this judgment I shall therefore deal only with Lexi’s surviving application for summary judgment.

Save in one respect, the principles upon which the court acts in dealing with summary judgment applications were not the subject of detailed submission or dispute. I had occasion to summarise those principles when dealing with an earlier summary judgment application in separate litigation arising out of the demise of Lexi, in a judgment dated 16^th November 2007 in proceedings the short title and reference to the record of which is Lexi Holdings Plc v. Shaid Luqman & ors [2007] EWHC 2652 (Ch) (“the 2007 judgment”). I refer to paragraphs 2 and 9 to 11 of that judgment, and I address the applications now before me in accordance with the same principles.

The particular aspect of the court’s approach to summary judgment applications about which submissions were made to me concerns what is sometimes labelled Micawberism. Put shortly, the principle is that, in order to challenge an assertion that a party has no real prospect of success, or of successfully defending, in relation to a claim or issue, it is necessary to do more than say that some evidence currently unavailable might turn up in time for the trial. The party facing the summary judgment application must, whether by evidence or submission, persuade the court that there is a sufficient prospect that material will become available in time for trial so as to afford the defendant the real prospect of a successful defence.

This principle long pre-dates the Civil Procedure Rules, but a recent expression of it is to be found in the judgment of the Court of Appeal in ICI Chemicals & Polymers Limited v. TTE Training Limited [2007] EWCA Civ 725, at paragraph 14, in relation to the question whether material not currently available might lead to a different construction being placed upon the contract sued upon:

“Sometimes it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial. In such a case it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction.”

That was a case in which the parties to the dispute were also parties to the contract to be construed, and might reasonably be supposed to have been able to adduce evidence demonstrating a real prospect of the subsequent availability of material relevant to the suggested defence. As will appear, although the present case is also in part one about the construction of a series of agreements, the defendant solicitors were not themselves parties to those contracts. Rather, they were advisers to Lexi as one of the parties, and tendered specific advice about the meaning of the contractual term principally in issue. The analogy between this case and the ICI case is therefore close, but not precise.

The essence of the claim in respect of which Lexi seeks summary judgment as to certain issues is that while retained as Lexi’s solicitors, Pannone made a series of payments of Lexi’s money held on client account which, although made on the express instructions of Lexi’s managing director (or his assistant) were nonetheless unauthorised. Lexi therefore seeks equitable compensation or damages in respect of the misapplication of those monies.

The background to this, at first sight, rather surprising claim is that Lexi’s managing director, one Shaid Luqman, has in other proceedings not involving Pannone already been adjudged to have perpetrated a very large scale fraud both on Lexi and upon its principal lenders Barclays Bank Plc, and later upon a lending syndicate led by Barclays, and that the payments now alleged to have been unauthorised were directed by him to be made in furtherance of that fraud. A detailed description of Shaid’s fraud is to be found in the 2007 judgment, a further judgment of mine dated 16^th July 2008 (“the 2008 judgment”), two judgments of Henderson J dated 2^nd July and 19^th October 2007, and a judgment of the Court of Appeal dated 26^th February 2009. Although Pannone was not a party to the proceedings which led to any of those judgments, they sensibly do not challenge the generality of the findings set out therein. They do reserve the right to challenge certain specific findings, but none relevant to Lexi’s application for summary judgment.

The funds with which Shaid perpetrated his fraud were, almost without exception, lent to Lexi by Barclays and, later, the Barclays led syndicate pursuant to a series of Facility Agreements, the first five of which were dated respectively 29^th November 2001, 15^th April 2002, 23^rd October 2002, 4^th July 2003 and 2^nd April 2004. The first four of those Agreements related to loans by Barclays. The fifth was the first to govern a loan by the syndicate. It was in due course superseded in 2005, but only after the termination of Pannone’s retainer.

Lexi’s business consisted of the making of short-term bridging loans to customers in connection with the acquisition, the development and improvement of real property, and the successive facilities were, broadly speaking, designed to provide 80% of Lexi’s funding requirement for that business, on a revolving basis, the remaining 20% being provided by way of equity injection by Lexi’s shareholders or backers, or by subordinated loan made on directors’ loan account.

Pannone were retained by Lexi to advise in connection with each of the five successive Facility Agreements. A common feature of each of them was that Lexi undertook to Barclays that all amounts that it received under or in connection with bridging loan agreements with its customers would, unless used to repay or pre-pay lending to Lexi by Barclays, be paid into a Receipts Account with Barclays, to which Barclays could at its discretion have recourse at any time for making pre-payment of the loans, but which was otherwise available for use by Lexi, although only with Barclays’ permission.

The partner at Pannone principally charged with the conduct of its retainer by Lexi was a Mr James Farn. It was he who provided Pannone’s advice to Lexi in relation to the successive Facility Agreements. In a witness statement made for these proceedings in March 2009, Mr Farn acknowledged that he would have read the Agreements in full, although he was neither asked to advise about nor even fully understood all the complex commercial provisions which they contained. There can be no doubt however that he well understood the meaning and effect of Lexi’s undertaking to pay all receipts from bridging loans into the Receipts Account, because in an undated email in October 2002 he advised, in relation to the relevant clause of what shortly thereafter became the 23^rd October 2002 Facility Agreement:

“As drafted, it appears that Barclays will be the sole recipient of the redemption proceeds payable under individual bridging loans; there is no possibility for Pearl to retain a separate redemptions account at any other bank (even though that may be charged in favour of Barclays).”

Lexi’s claim against Pannone arises from the fact, which Pannone admit, that Pannone made a number of payments on Shaid’s instructions (or the instructions of his assistant Sandra Blades) from the firm’s client account of monies representing the proceeds of the redemption of bridging loans made to Lexi’s customers, not to the Receipts Account, nor even to Barclays, but to a number of other recipients, including an account in Shaid’s name at Lloyds TSB (the Lloyds TSB Account), firms of solicitors instructed by Lexi in connection with other transactions, and to a Mr Jim Denney, in accordance with an invoice to Lexi for services purportedly rendered.

Lexi’s case in relation to each of these payments contains the following common elements:

By its Defence, Pannone denies that the payments which they were instructed to make did involve Lexi in committing a breach of its obligations to Barclays. Separately and distinctly, Pannone assert that they were entitled and indeed obliged to act on Shaid’s instructions, because as managing director of Lexi he had actual or apparent authority to give them. The Defence therefore raises (among others) two discrete issues in the way of Lexi’s claim, namely:

It was no part of Lexi’s original case that Pannone knew that Shaid was committing a fraud. Rather it was alleged that Pannone knew facts which ought objectively to have led it to that conclusion, such that Pannone ought to have known that Shaid was committing a fraud: see Lexi’s reply to Request 29 in an RFI from Pannone dated 1^st December 2008. Amendments were made by Lexi to its Particulars of Claim during the adjournment of the summary judgment applications to introduce the allegation that Pannone were aware that Shaid was committing a fraud, but that allegation has not been relied upon by Lexi at the adjourned hearing in support of its application. Rather, Mr Philip Marshall QC for Lexi told me that the allegation was introduced, in part, by way of answer to Pannone’s cross-application, which was thereafter discontinued. Nonetheless Lexi has continued to seek summary judgment on the basis that Pannone knew or ought to have known that Shaid had no authority to give any of the instructions pursuant to which Pannone made the payments in issue.

This issue raises questions of construction, variation, waiver and estoppel. It is convenient to deal with the question of construction first.

Clause 10.2 of the Facility Agreement dated 29^th November 2001 is as follows:

“Receipts Account

(a)

The Lender has sole signing rights in relation to the Receipts Account.

(b)

The Company shall ensure that any amount received by it under or in connection with the Bridging Finance Documents is:

(i)

applied forthwith towards the repayment or prepayment of a Loan; or

(ii)

paid forthwith into the Receipts Account.

(c)

The Lender may, in its absolute discretion, apply any or all amounts standing to the credit of a Receipts Account in prepayment of the Loans.

(d)

Amounts standing to the credit of the Receipts Account shall bear interest at a rate considered by the Account Bank to be a fair market rate.”

Under clause 10.3 Lexi was obliged to hold any amount received or recovered other than by credit to the relevant Account subject to the security created by the Finance Documents (as defined). Clause 10.3(c) provided:

“If so requested by the Company, the Lender may at any time and in its absolute discretion pay any amounts standing to the credit of a Receipts Account into any other Account.”

All subsequent versions of the Facility Agreement contained provisions substantially to the same effect, and it is not suggested that such small variations in the language as later appear have any consequence in terms of their true construction. In fact, later versions of the Facility Agreement removed what is clause 10.2(b)(i) of the November 2001 Agreement, leaving therefore a simple obligation on Lexi to pay all amounts received under or in connection with the Bridging Finance Documents into the Receipts Account.

In order to make sense of clause 10.2, it is necessary to set out some of the relevant definitions. Bridging Finance Documents were defined as meaning:

“all documents relating to the provision of a Bridging Loan, the forms of which have been agreed between the Lender and the Company.”

Later versions of that definition required the documents to have been either agreed pursuant to provisions in a Schedule, or to have been approved in writing by the Lender at some later date.

Bridging Loan is defined in the first Facility Agreement (dated 24^th November 2001) as meaning:

“(a)

a Development Loan; or

(b)

an Improvement Loan;

(c)

a loan, other than an Improvement Loan or a Development Loan, made by the Company to a Customer for any purpose provided that the aggregate value of all outstanding loans under this paragraph (c) does not at any time exceed five per cent. of the aggregate value of all outstanding Bridging Loans at that time; or

(d)

an Existing Bridging Loan.”

Later versions of the Facility Agreement defined Bridging Loans as meaning simply a Development Loan an Improvement Loan or an Existing Bridging Loan.

By clause 19.15 of the November 2001 Facility Agreement, Lexi undertook to ensure that each Bridging Loan was made only on the Approved Terms, a definition which meant, in relation to new loans, the terms of the Bridging Finance Documents. Subsequent versions of the Facility Agreement contained provisions to the same effect.

The “security created by the Finance Documents” referred to in clause 10.3(a) of the November 2001 Facility Agreement included, at clause 3.1 of a Deed of Charge (set out in Schedule 6 to the Facility Agreement), a charge by way of first fixed charge in favour of the Lender of all its rights, title interest and benefit, present and future, in and to the Bridging Loans. For that purpose, Bridging Loans were defined as meaning:

“All mortgage loans to which the Chargor shall, at any time, become beneficially entitled …”

The issue of construction arising from those detailed provisions is whether clause 10.2 of the November 2001 Facility Agreement (and its successors) required Lexi to pay into the Receipts Account all amounts received (including redemption) under or in connection with all loans to its Customers, or only in connection with loans to its Customers made from funds provided by the lending banks. Put the other way round, Mr Lawrence QC for Pannone submitted that it was arguable as a matter of construction that clause 10.2 had no application to the redemption proceeds of loans made by Lexi funded either from equity, or from funds provided by its directors on loan account.

Mr Lawrence’s main point was that since Bridging Finance Documents were only documents in the form approved by the Lender pursuant to the Facility Agreements, Lexi remained free to make loans to Customers otherwise than in accordance with such forms, provided only that the finance for such loans did not come from the Lender.

In my judgment it is clear that the Facility Agreements, and each of them, required Lexi to pay into the Receipts Account any amount received under or in connection with the documentation regulating loans made by it to any of its customers, whether or not the funding for such loans originated from Barclays or the syndicate. My reasons follow. First, both ‘Bridging Loans’ and ‘Customer’ are defined in terms which neither express nor imply any limitation based upon the source of Lexi’s funding. Secondly, Lexi undertakes to make bridging loans only in accordance with the Approved Terms, that is in accordance with Bridging Finance Documents as defined. It was therefore the common understanding of the parties reflected in the Facility Agreements that all Lexi’s loans to its Customers would be made pursuant to Bridging Finance Documents as defined.

Thirdly, the Facility Agreements all assume (by reference to provisions which I need not set out, due to their length and complexity) that Lexi’s loans would be funded, broadly, as to 80% from lending pursuant to the Facility Agreements, and as to 20% from Lexi’s own resources. Nonetheless, the form of Deed of Charge plainly extended to all Lexi’s loan receivables, whether funded from the Facility Agreements or from its own resources, so that Lexi would not have been free to apply redemption monies received from any of its loans otherwise than with the Lender’s permission. The provision for payment of all such receipts into the Receipts Account is therefore naturally to be construed in accordance with the ambit of that charge, so as to apply to the proceeds (including redemption proceeds) of all Lexi’s lending, however funded.

I note in passing that this construction is exactly reflected in Mr Farn’s advice to Lexi in his October 2002 email from which I have quoted in paragraph 12 above.

Pannone’s more extensive case in relation to the first issue was that, even if construed as I have concluded that it should be, Pannone had a real prospect of establishing at trial, albeit that it could not establish at present, that this obligation was varied during the course of Lexi’s relationship with Barclays, so as to permit Lexi to apply the proceeds of the redemption of loans funded from its own resources otherwise than by payment into the Receipts Account, for example by repaying the directors’ loans which had provided the relevant funding resources. For this purpose, Mr Lawrence took me to a number of documents which, he submitted, made the prospect that such a variation could be proved at trial more than fanciful.

Mr Lawrence sought to make his case good in two ways. First he drew my attention to documents already available to Pannone (partly as a result of an order for specific disclosure by Patten J in January 2009) which he submitted pointed to the real possibility of a settled practice, as between Lexi and Barclays, pursuant to which Barclays permitted Lexi to pay redemptions of loans funded from its own resources otherwise than into the Receipts Account. Secondly, he submitted that the particular circumstances of the present case justified an assumption that a much greater volume of documentation, determinative of that issue, and realistically probative of such a settled practice, could be expected to be available in time for trial, upon an application for third party disclosure by Pannone against Barclays.

It is convenient to deal with those two submissions in reverse order, in particular because a proper understanding of the circumstances relevant to the availability of documents to Pannone (and therefore to the court at this stage) provides the context against which to address the evidential significance of the specific documents which they rely upon.

Although Barclays appointed the administrators of Lexi who now have the conduct of its affairs, including these proceedings, on its behalf, and although Barclays is the main (but not the sole) creditor for the benefit of which these proceedings have been brought, Barclays is not of course a party. Furthermore, although the administrators are partners in KPMG, which advised Barclays for a significant part of the relevant period, and although Lexi’s solicitors in these proceedings, DLA, were Barclays’ solicitors during the same period, it is not to be assumed that Lexi now has access to, or even knows through its administrators or solicitors the detailed content of all Barclays’ documentation which might bear upon this issue. In fact, neither Lexi through its administrators nor Pannone requested Barclays to disclose documents relevant to this issue at any time between the commencement of these proceedings and the conclusion of the first part of the hearing of the summary judgment applications, on 26^th June 2009. Since then, Lexi has asked Barclays whether it has documents supportive of Pannone’s case that the Facility Agreements were varied, and been told in correspondence that it does not, while Pannone has invited Barclays in due course to make third party standard disclosure voluntarily in relation to this issue, and Barclays has declined to do so.

Documents principally relevant to this issue might be expected to consist of communications passing during the relevant period between Barclays and Lexi, so that copies might at first sight be supposed still to be in Lexi’s possession. Unfortunately, Shaid and his brother Waheed Luqman concluded their fraudulent misconduct of their duties for Lexi by ensuring, at the time of the administrators’ appointment, that as many as possible of Lexi’s routine records were either destroyed or put beyond the administrators’ reach.

Thus although as the result of the order of Patten J in January (which has not been appealed) Pannone has now obtained from Lexi such disclosure of documents as it fairly needs for the purpose of serving a defence and responding to the summary judgment application, it is probable that there remains a significant body of documents in the possession of Barclays relevant to the issue whether there was a settled practice by which it permitted Lexi to pay redemptions from loans funded out of its own resources otherwise than into the Receipts Account. The documents will consist of Barclays’ copies of routine communications with Lexi, as well as of internal memoranda and diary notes recording aspects of the banker/customer relationship governed by the Facility Agreements as it developed over time. For present purposes the question is whether the submission that Barclays’ documentation will be probative of such a settled practice passes the reality test imposed by Part 24.

Although counsel were agreed that Pannone must advance more than a purely Micawberish speculation to that effect, there was a sharp difference between them as to what the Court of Appeal meant (in paragraph 14 of the ICI case which I have quoted above) by the phrase “sometimes it is possible to show by evidence that … such material is likely to exist ….” Mr Marshall QC for Lexi submitted that “likely” meant probable. Mr Lawrence submitted that it meant only that there had to be a real (i.e. more than fanciful) prospect that such documents, probative of such a settled practice, existed and could be expected to be available at trial.

It is of course wrong to treat this as an issue about the dictionary meaning of the word “likely”. The test which the Court of Appeal were clearly applying in paragraph 14 of their judgment in the ICI case was whether, on the evidence before the court, the party resisting the summary judgment application could show a real rather than fanciful prospect of success on the relevant issue of construction. That is what I have elsewhere described as the reality test. Decisions on the court’s function at the summary judgment stage have constantly emphasised that, in sharp contrast with trials, the court is not to address questions of probability. As Lord Hobhouse put it in Three Rivers DC v. Bank of England [2001] UKHL 16 at paragraph 158:

“The criterion which the judge has to apply under CPR Part 24 is not one of probability; it is absence of reality.”

In my judgment, the prospect that documents probative of a defence, or of a party’s case on a particular issue, may become available in time for trial is just one of the factors to be weighed in the balance in applying the reality test. I consider it unreal to suppose that the Court of Appeal thought that by the use of the word “likely” in paragraph 14 in the ICI case, the court was being directed to decide, at the summary judgment stage, whether it was, on the balance of probabilities, more likely than not that such probative documents would be available in time for trial. Provided that the party making that assertion produces evidence which satisfies the court that there is a real prospect that it will prove its case at trial by documents not currently available, then summary judgment to the contrary, which would forever prohibit that exercise, should not be given. The question is not whether there is a real prospect that documents relevant to the issue will become available at trial, but whether documents which prove that party’s case on that issue will become available.

I therefore turn to the question whether the evidence specifically relied upon for this purpose by Pannone satisfies that test. Mr Lawrence grouped the evidence under five strands. The first consisted of evidence that Barclays knew that Lexi was funding part of its lending from directors’ loan account, even while the Facility Agreements prohibited Lexi from having any debts of the type which would be constituted by a loan account. All the Facility Agreements in force until April 2004 contained a prohibition upon Lexi incurring Financial Indebtedness (a widely defined phrase) subject to limited exceptions which did not include a directors’ loan account used for funding lending. Only in the Facility Agreement dated 2^nd April 2004 was this restriction removed, by permitting indebtedness under a Subordinated Loan Agreement which included the directors’ loan account. In fact, a half-hearted attempt to achieve the same result was made in the Facility Agreement dated 4^th July 2003, in part by a last minute manuscript amendment. All prior Facility Agreements assumed that Lexi’s 20% contribution to its lending resources would be made by equity, rather than by directors’ loan.

Surviving emails show that by June 2003 at the latest, Barclays was aware that Shaid was providing substantial “on demand” funding for Lexi’s lending business (i.e. by directors’ loan account) and that this led to the beginning of a process of amendment to the Facility Agreements whereby his loan account was to be incorporated into the agreed lending structure by way of subordinated loan, as in due course it was. Further, the evidence of a Mr Clive Gresham tendered in the proceedings against the Luqman family asserted, without reference to any particular part of the relevant period, that Lexi’s contribution to the lending from its own resources included funds provided by the directors. Mr Gresham only took over the management of Barclays’ relationship with Lexi in 2004, so that his evidence adds little to that which appears from the emails.

This strand of Pannone’s evidential case does little to assist a conclusion that further documents might reveal a settled practice permitting redemption payments to be made otherwise than into the Receipts Account. In particular, whereas the Facility Agreements were indeed (albeit rather slowly) amended so as to accommodate what would otherwise have been a breach of them, the prohibition on payments otherwise than into the Receipts Account was inserted without amendment on every occasion when the Facility Agreements were amended.

The second strand of evidence was alleged to suggest that Barclays both knew and consented to Lexi making repayments of loans made on the directors’ loan account from the proceeds of the redemption or repayment of Bridging Loans to Customers funded by Shaid out of that loan account. The evidence consists of passages in two reports, prepared respectively in February and September 2004 by PricewaterhouseCoopers, on instructions from Barclays, in both of which there appears the following passage:

“For loans that are funded by the director’s loan account either in part or in their entirety the redemption statement is sent to the managing director. This is then passed to the Head of Finance who then adjusts the director’s loan account balance as appropriate.”

The same reports also notified Barclays that funds used by Lexi to make Bridging Loans funded by the director’s loan account could not be traceable to any Lexi bank account with Barclays, since they were “funded from … a director’s loan account administered by solicitors ….”

Reliance was also placed upon the following passage in a report by KPMG in early 2005 (after Barclays had become concerned about the behaviour of Lexi, and of Shaid in particular, but before any enforcement steps were taken), in Appendix 2, headed “Analysis of potential leakage”:

Risk

 Where partial redemption of the loan principal occurs, this may lead to a disproportionate allocation as to equity rather than equity and bank funded debt.

Proposed course of action

 The Company to agree that where a partial redemption occurs as to principal, that the repayment is to be allocated pro-rata to the amount of outstanding bank funded debt and equity.

Mr Lawrence submitted that both those passages, whether taken singly or altogether, were at least consistent with a settled practice under which repayments of loans funded by Lexi from the director’s loan account were applied in reducing the loan account or (in KPMG’s language) “allocated … to equity”, rather than by being paid into the Receipts Account for the purposes of pre-paying or repaying Barclays’ loans to Lexi. Mr Marshall submitted that all these reports were about Lexi’s accounting treatment of loan repayments, rather than about the application of the cash-flow generated by repayment, so that they had nothing to do with the question whether repayments were to be paid into the Receipts Account. During the adjournment following 26^th June Lexi obtained a witness statement from Mr Brian Green, one of Lexi’s joint administrators and a partner in KPMG, to the same effect. Mr Marshall submitted that the passages in the reports were entirely consistent with the continuing obligation to pay loan redemption proceeds into the Receipts Account, from where they could with Barclays’ consent then be paid out either in repayment of Barclays’ loans or in reduction of Shaid’s loan account, as appropriate.

The next strand consisted of evidence suggesting that Shaid himself considered that there was such a settled practice, and felt no constraint in instructing another firm of Lexi’s panel solicitors accordingly, notwithstanding that his instruction might in the ordinary course of events easily have been reported by that firm to Barclays. The evidence consists of a letter from Shaid to Wacks Caller dated 19^th July 2002, containing the following passage:

“Once a loan is due to complete, the funds will be transferred into your client account and for this we will require 24 hours notice. On redemption of loans all funds are to be transferred to our deposit account at Barclays (if funds have been drawndown from Barclays) account. Funds which have been used from our own funds are to be returned to our Lloyds/TSB account also listed below. Before each loan is completed we will confirm the source of the funds.”

In his evidence in these proceedings, Mr Farn said that he had some vague recollection of a similar understanding. Under the heading “Payments into and out of the Lloyds TSB Account”, he said this:

“There are some documents on Pannone’s file … which suggest that I regarded this account as Shaid’s personal account. I am not sure that it was as clear-cut as that at the time. I think that if I had been asked at the time about my understanding of the Lloyds account, I would have said that it appeared to be an account which was used in connection with the introduction of directors’ funds into the lending process …”

Later he said:

“In these circumstances I saw nothing remarkable about Shaid’s instructions to pay money from time to time into the Lloyds account. I regarded these instructions as linked to the use of Shaid’s own monies in support of Pearl’s lending. I did not consider that the provisions in the Facility Agreements requiring Pearl to pay redemption proceeds into the Receipts Account applied to the proceeds of loans that had been made outside the Barclays facility with Pearl’s own monies.”

Earlier, during an interview under section 236 of the Insolvency Act 1986, Mr Farn had answered questions in terms which gave no hint that he had any such recollection. He was asked:

“And was it your understanding that all redemptions would need to go back into that receipts account?”

He replied:

“Correct, yes.”

Later, he was asked:

“But, as far as you can recall, moneys should not have been coming from Lloyds and they should not have been going to any Lloyds account?”

He replied:

“No, it should all have been funded through the Barclays facility.”

Mr Farn’s evidence on this point also needs to be considered in the light of his clear advice to the contrary given to Lexi in October 2002, which I have quoted in paragraph 11 above. Nothing on Pannone’s files suggest that this advice was contradicted, rejected or withdrawn.

Next, Mr Lawrence relied on evidence suggesting that all Lexi’s panel solicitors, Barclays and even its own solicitors DLA made direct payments of large sums of money connected with Lexi’s business into the Lloyds TSB account. In particular, he relied upon a direct payment from Barclays to the Lloyds TSB account of £8.75 million on 7^th July 2004, and upon a payment by DLA directly into the Lloyds TSB account of £1.35 million on 29^th December 2004. These, Mr Lawrence submitted, demonstrated that Barclays both knew and consented to Lexi monies being paid into the Lloyds TSB account, despite the uniform express condition in all versions of the Facility Agreement that Lexi should have no bank accounts other than with Barclays. Mr Marshall’s response was that Barclays’ accounting records of the £8.75 million payment showed that Barclays understood it to be a payment not to a Lexi account, but to Shaid personally (the payee being described as “S. Luqman”) and that the DLA payment could not sensibly be attributed as a payment by DLA on behalf of Barclays as their client, but in all probability a repayment by some unidentified DLA client borrower from Lexi by way of bridging loan.

Finally, Mr Lawrence relied upon what he described as aspects of the Barclays/Lexi relationship which were, on any view, so extraordinary as to make any issue about that relationship unsuitable for summary determination. He relied in particular upon a finding of mine, in my judgment given in the proceedings against the Luqman family on 16^th July 2008, at paragraph 122, that after Barclays had been informed of judicial findings in late 2004 that Mr Luqman had dishonestly concealed an auditor’s statement from Barclays, during the negotiation in a large increase in Lexi’s facility, suggesting fraud on his part, by combination of abuse of process, perjury and forgery, Barclays had failed to report these matters to KPMG when instructing them to carry out a forensic investigation into Lexi with a view to advising the syndicate banks as to an appropriate response. He referred also to the failure by Mr Palmer (Mr Gresham’s predecessor in charge of the Barclays/Lexi relationship) even to apply and maintain his bank’s modest controls over Lexi’s behaviour, by requiring redemption monies to be paid into the Receipts Account, rather than into Lexi’s ordinary current account, as had by then become habitual. Mr Marshall’s response was that this had nothing of itself to do with the question whether the obligation to pay redemption monies into the Receipts Account had been varied or waived, so as to permit redemptions to be paid into a personal account of Mr Luqman at a different bank.

It should not be thought from my summary of the evidence relied upon by Pannone in this regard, that there is no evidence before the court to the contrary, i.e. evidence to the effect that the obligation to pay all redemption monies into the Receipts Account remained at all times in force as between Barclays and Lexi. While it is not for the court on a summary judgment application to resolve conflicts of evidence, the evidence to the contrary is material to the question whether there is a real prospect of Pannone establishing the removal of that obligation by proof of a settled practice to the contrary.

First and foremost, the Facility Agreements, and the constant re-statement of that obligation without amendment on every relevant occasion, speak for themselves. In particular, all the Facility Agreements contained provision requiring any variations to be in writing, and there were none. I have already referred to Mr Farn’s written advice to Lexi to the same effect. In addition to that, there survive emails both from Mr Palmer and from his colleague Mrs Luff at Barclays telling both Lexi and Pannone in terms that all redemptions were to be paid into the Receipts Account. Both emails were dated 12^th April 2002 and stated in the clearest terms that all redemption receipts “both equity and facility” needed to be paid into the Receipts Account. It is clear that “equity and facility” refer respectively to loans funded from Lexi’s own resources and from Barclays under the Facility Agreement.

Lexi’s recent enquiry of Barclays as to relevant documents elicited a copy of a letter from Mr Davis, a director of Lexi, to Barclays dated 26^th May 2004 seeking, in terms, amendments of the Facility Agreement including a relaxation of the requirement to pay all relevant monies into the Receipts Account, specifically on the ground that much of it was Lexi’s money, directors’ loan account money or interest payments making up Lexi’s cash flow, and more generally on the ground that the relaxation was part of a package which would, if permitted, “improve the practicality of running the business”. This letter, written just after Pannone ceased to act for Lexi, implicitly acknowledges on Lexi’s behalf that the obligation to pay all relevant money into the Receipts Account remained in full force unless and until Barclays acceded to the request for its relaxation.

The same witness statement of Mr Gresham to which I have already referred states in terms (at paragraph 9) his understanding that all redemption receipts were to be paid into the Receipts Account and, at paragraph 28, his having had no previous knowledge, before May 2005, when informed by Lloyds itself, of Mr Luqman’s Lloyds TSB account, or its use for the receipt of large sums of Lexi’s money. Finally, Mr Marshall relies with considerable force on the inherent improbability that Barclays, having the benefit of a charge on all Lexi’s bridging loan receivables, (regardless how those loans had been funded) would have consented to having a substantial part of redemption receipts paid into an account which was neither under Barclays’ control, nor even in Lexi’s own name.

In my judgment, the combined effect of all that evidence is as follows. First, it is sufficient to demonstrate that Pannone have a no more than fanciful prospect of proving at trial a course of dealing between Barclays and Lexi in which its obligation to pay all redemption monies, including those from loans funded otherwise than from Barclays advances, into the Receipts Account was either formally amended, or waived in the sense that Lexi thereby acquired the right to pay relevant money otherwise than into the Receipts Account without thereby committing a breach of contract. Mr Davis’s letter demonstrates that it remained Lexi’s understanding at the very end of Pannone’s retainer that the obligation remained in full contractual force. I regard it as fanciful that further disclosure from Barclays would lead to the emergence of material which would prove the contrary.

Secondly however, there remains a more than fanciful prospect that Pannone may establish at trial that Barclays frequently or even routinely failed strictly to enforce that obligation, knowing that it was not in fact being complied with by Lexi. My conclusion to that effect is based upon the following reasons in particular. First, I have already found in the proceedings against the Luqman family that Mr Palmer did not in fact insist upon monies being paid into the Receipts Account, so that a habitual practice developed of them being paid into Lexi’s current account at Barclays. The terms of that current account imposed by no means the same controls upon Lexi’s use of the money as did the terms governing the Receipts Account. In summary, whereas Barclays’ consent was required for every payment out of the Receipts Account, and Barclays was free to use monies in that account to prepay or repay the Facility lending, the only control on the current account was Lexi’s overdraft limit from time to time.

Secondly, the references in the PWC reports to redemptions of loans being used to repay the director’s loan account are at least consistent with a practice pursuant to which Barclays was content for Lexi to use such repayments for a purpose that did not require them to be paid into the Receipts Account. I accept Mr Marshall’s submission that those documents are also consistent with such a treatment being merely a matter of accounting rather than cash-flow but, again, this is of itself an issue upon which, for example, the framers of the relevant reports might shed useful light at trial. Mr Green has now done so in relation to the KPMG report, and in a manner unhelpful to Pannone, but his evidence is that the KPMG report was concerned about the future rather than the past. The PWC reports are earlier in time, and their authors have yet to comment on them.

Thirdly, there is some force in Mr Lawrence’s reference to Shaid’s clear instructions to Wacks Caller that there was such a practice. It is not that a statement emanating from Shaid has any intrinsic weight of its own. For reasons which will be apparent from my judgments in the proceedings against the Luqman family, and those of Henderson J, the precise opposite is the truth. The force of the point is that Wacks Caller were panel solicitors, approved by Barclays for being retained in connection with Lexi’s bridging loan business, and who Shaid left at liberty (so far as the documents show) to explain the instructions which they had received from Shaid to Barclays without restraint.

Mr Marshall’s forceful response was that, first, Wacks Caller was not itself involved in the drafting of the Facility Agreements, and may have been unaware of the contractual provisions to the contrary, and secondly, that Shaid was a brazen risk-taker who appeared to have been content to go on using the Lloyds TSB account as one of the primary instruments of his fraud, even at a time when, after April 2004, Lloyds had become a lending member of the Barclays’ syndicate. It was common ground that Lexi’s panel solicitors were not directly engaged in detailed communications with Barclays about either the source of particular bridging loan funds, or about the origin of redemption payments, so that, Mr Marshall submitted, Shaid may have regarded the risk that Wacks Caller might report his instructions to Barclays as one worth taking. Again, these are powerful submissions which may well prevail at trial, but insufficient entirely to displace the prima facie appearance that Shaid made no secret of his understanding that Lexi could, without getting into trouble with Barclays, use the proceeds of bridging loans funded from its own resources without first paying them into the Receipts Account.

Finally, whatever may or may not have been Mr Gresham’s knowledge from December 2004 onwards, I consider it much more than a fanciful possibility that Barclays were aware from June 2004 onwards that Lexi made large payments to an account in the name of its managing director at Lloyds TSB, such that, since Barclays permitted redemption monies to be paid routinely into Lexi’s current account, there was nothing to stop those monies ending up in Shaid’s personal account at Lloyds TSB. £8.75 million is an enormous amount for a company to pay to a personal account of its managing director by a single payment, and I find it difficult to believe that this went entirely unnoticed at Barclays.

The real prospect that it may be shown at trial Barclays did not enforce Lexi’s obligations to pay all redemption monies into the Receipts Account nonetheless falls well short of a real prospect that Pannone will prove at trial that there was a variation or waiver of Barclays’ contractual right to the contrary. It is common to find that a bank, armed with wide ranging contractual rights under a sophisticated facility structure, fails or declines strictly to enforce all the borrower’s continuing obligations, but without thereby varying or waiving its right to enforce them in the future, or even exposing itself to a disabling estoppel.

For what it is worth therefore, Lexi is entitled to summary judgment on the issue whether, during its retainer of Pannone, the Facility Agreements permitted the payment of monies received in connection with its loans otherwise than into the Receipts Account. As alleged in paragraph 14 of the Re-Amended Particulars of Claim, they did not. Nonetheless, even if in such circumstances those payments would have amounted to a breach of the Facility Agreements, Pannone have a real prospect of showing at trial that the obligation in question was, to Barclays’ knowledge, a rule more favoured in the breach than in the observance.

This issue was fought out on this application by reference first to actual authority and secondly to apparent (including usual) authority. The issue arises not only in relation to payments made by Pannone from its Lexi client account into the Lloyds TSB account, but also in relation to payments by Pannone from its Lexi client account to other solicitors, and a payment to a Mr Jim Denney, in each case on Shaid’s instructions. It is convenient to deal with the payments to the Lloyds TSB account first.

Lexi’s case on this issue faces a threshold difficulty arising from the way it put its case against Shaid and the other members of the Luqman family in the proceedings leading to the 2007 judgment. It might have been expected that its present case, namely that the Lloyds TSB account was Shaid’s personal account and that all payments of Lexi’s money into it were therefore unauthorised, would be reflected in a similar allegation against Shaid himself in the earlier proceedings. By contrast, the allegation in those proceedings was that the Lloyds TSB account was opened by “Shaid acting for and on behalf of the Company” (i.e. Lexi), and that particular payments out of, rather than into that account were misappropriations of Lexi’s money by Shaid. In substance, Lexi’s case against Shaid was that the Lloyds TSB account was a Lexi account, albeit named “S. Luqman T/A Pearl Holdings (Europe)”.

A main plank of Shaid’s defence, adopted by his siblings Waheed, Monuza and Zaurian, was that the Lloyds TSB account was his personal account, not Lexi’s. Judgment was obtained by Lexi against Shaid upon his defence being struck out for breaches by him of orders made in the proceedings, and Lexi obtained summary judgment on liability against his siblings pursuant to my 2007 judgment. The case for summary judgment against the siblings depended upon Lexi proving its case against Shaid: see paragraph 23 of the 2007 judgment.

It was necessary for me to devote a substantial part of the 2007 judgment to the question whether the Lloyds TSB account was a Lexi account or a personal account of Shaid: see paragraphs 39 to 51. Having noted at paragraph 39 that Pearl Holdings (Europe) was Lexi’s name between 2000 and 2004, and that its case was that the account was overwhelmingly (but not entirely) funded by its own monies, I concluded at paragraph 51 that Shaid’s case that it was “set up otherwise than as an account of the Claimant” (i.e. Lexi) was based on a fabrication. The basis upon which I then decided that all payments out of the Lloyds TSB account otherwise than for Lexi’s benefit were misappropriations of Lexi’s money was precisely because it was a Lexi account, having been set up for that purpose. There was no suggestion that payment of Lexi money into that account was unauthorised, or thereby misappropriated.

Had it been Lexi’s case in 2007 that the Lloyds account was Shaid’s personal account, a claim against him for an account of all monies paid out of it otherwise than for Lexi’s benefit would have involved demonstrating by reference to established tracing principles that the payments out were of Lexi’s rather than his money. A simpler alternative might have been a claim based upon all payments into the account, but neither was attempted.

Mr Marshall submitted that I need not be troubled by the difference in the way Lexi’s case is now put, compared to the way it was put against the Luqman family in 2007. The two could be reconciled by treating the Lloyds TSB account as Lexi’s beneficially, on the basis that Shaid held all money of Lexi transferred into it without authority on constructive trust. The account could therefore be both Shaid’s personal account, and Lexi’s account beneficially, at the same time. He submitted further that I should not be unduly concerned by the different way the case was put in 2007, in circumstances where the Administrators had then been reliant upon a limited understanding about Lexi’s affairs, which had since improved.

For present purposes the question arising from these differences is whether they make any difference to Lexi’s case against Pannone that they made unauthorised payments of Lexi’s money to the Lloyds TSB account. The question needs to be addressed in relation both to actual and apparent authority.

As to the first, I am satisfied beyond the possibility of any real argument to the contrary that Shaid had no actual authority to direct payment of redemption money into the Lloyds TSB account. My reasons are as follows. First, it has already been determined as between Lexi, Shaid and other members of his family in the earlier proceedings that Shaid’s so-called director’s loan account was in fact a sham. Neither he, nor his family, nor rich foreign businessmen, invested in Lexi through his loan account, as he falsely maintained. The loan account was, from first to last, a primary instrument whereby he misappropriated enormous sums from Lexi: see paragraphs 46 and 81 of the 2007 judgment.

Secondly, a director (or other agent) has no actual authority to defraud his company or principal. The only legitimate basis upon which Shaid could have directed payment of Lexi’s monies to an account in his own name was either in payment of some debt owed to him (whether by way of dividend, salary or repayment of director’s loan account) or because he was genuinely using the account as a trustee for the receipt and administration of Lexi’s money. As Mr Lawrence eventually conceded, none of those alternative possibilities for the legitimate payment of money to the Lloyds TSB account stand more than a fanciful prospect of proof.

Thirdly, by the end of his submissions, Mr Lawrence was driven back to a last ditch assertion that the use of the Lloyds TSB account could have been (at least at an early stage before fraudulent misappropriations were made from it) for Lexi’s benefit in the sense that it “lubricated” the process of the rapid flow of money to and from bridging loan customers in connection with its fast moving business. I regard that proposition as equally fanciful. The only beneficiaries from the setting up and use of the Lloyds TSB account were Shaid and his family, not Lexi. Its use as the conduit for the misappropriation of large sums, free from Barclays’ scrutiny as secured creditor, was a main plank in Shaid’s fraud both on Barclays and on Lexi itself. For the purpose of that analysis it matters not whether the Lloyds TSB account was a Lexi account or a personal account. It was used by Shaid as an instrument of fraud.

The more serious basis for Pannone’s case in relation to the payments to the Lloyds TSB account rested on alleged apparent authority. As to that, there was a keen and extended debate about the applicable legal principles to which I must shortly turn, but it is necessary first to describe precisely the basis upon which Lexi’s case that there was no apparent authority has been pleaded. This was not originally apparent from the Particulars of Claim, which in support of Lexi’s various claims against Pannone, relied upon an assortment of matters alleged to have put Pannone on inquiry as to Shaid’s propriety. Nonetheless, the precise basis for its claims of lack of apparent authority in relation to payments made by Pannone on Shaid’s instructions was precisely formulated in December 2008 in replies to an RFI, the replies being the same in relation both to the payments to the Lloyds TSB account, the payments to other solicitors and the payment to Mr Denney. The request was in each case the same:

Paragraph 15 of the Particulars of Claim (which is largely admitted) pleads that Mr Farn knew of the relevant terms of the Facility Agreements, and advised Lexi that it was not permitted to have accounts with other bankers. Paragraphs 12 to 14 plead the relevant terms of the Facility Agreements and Lexi’s construction of them.

It thus appeared at the first hearing of Lexi’s summary judgment application that, although Lexi relied upon Shaid’s fraud as the main ground for his want of actual authority, the case that Pannone was not entitled to rely upon apparent authority was entirely based upon the proposition that each payment instruction, if acted upon, would place Lexi in breach of the Facility Agreements. The implicit underlying legal proposition is that a director has no apparent or usual authority to give instructions which, if acted upon, would place his company in breach of a lending agreement with its bank, the rationale being it is no part of the ordinary function of a managing director to bring about a state of affairs which puts his company in breach of a contractual relationship upon which that company depends for its economic well-being and commercial solvency. Reduced to its bare essentials, the proposition is that where an agent gives an instruction which, if acted upon, would place the principal in commercial jeopardy, that is just as much outwith the agent’s apparent authority, as would be an instruction to do something for the agent’s personal benefit, as occurred for example in the leading case of Reckitt v. Barnett, Pembroke and Slater Limited [1929] AC 176, where the agent wrote a cheque on his principal’s account pursuant to a power of attorney, to be used for the payment of a debt owed by the agent personally in connection with his acquisition of a Rolls Royce motor car.

For his part, Mr Lawrence submitted that the law in this respect is by no means as clear as contended for by Mr Marshall, and (on the assumption that he failed on the first issue) his main reason for submitting that there should be a trial of the second issue was that the very uncertainty of the law in this respect made it unsuitable for summary disposal.

The starting point of Mr Marshall’s submission, in terms of apparent authority, was the following short paragraph in the judgment of Lightman J in Hopkins v. TL Dallas Group Limited [2005] 1 BCLC 543 at 574 (paragraph 94):

“Where an agent is acting within the usual authority of a person in his position, the third party will normally not be expected to inquire as to the detail of his authority unless the transaction is abnormal or there are circumstances giving rise to suspicion. If there are suspicious circumstances or abnormalities, then the third party should ‘make such inquiries as ought reasonably to be made’ to ensure that the authority is sufficient to bind the principal.”

Applying that analysis, Mr Marshall submitted that instructions to make payments of substantial sums in breach of the Facility Agreements exposed Lexi to such a commercial risk that they were, objectively, abnormal and that, since Pannone made no inquiries as to Shaid’s authority before making the relevant payments to the Lloyds TSB account, they cannot rely upon Shaid having had apparent authority to give those instructions. It is implicit both in Lexi’s pleadings (that “Pannone knew or ought to have known” that redemption monies should be paid into the Receipts Account) and in Mr Marshall’s submissions, that it matters not for the purpose of depriving a third party of the ability to rely upon apparent authority, whether the third party’s abstention from inquiry was because he knew the relevant facts (actual knowledge), believed them and abstained from inquiry so as not to learn them for certain (Nelsonian knowledge), or merely failed to inquire due to carelessness or inadvertence (constructive notice or negligence).

Mr Lawrence’s submissions on this point may be summarised as follows:

Mr Lawrence’s submissions proceeded of course upon the assumption that Pannone might lose on issue (1), and Mr Marshall’s case, at least in relation to the payments of redemption monies, depended at the first hearing entirely upon him succeeding on issue (1).

Mindful perhaps that his pleaded case left Lexi rather exposed, once Mr Lawrence had made clear his determination to hold Lexi strictly to its pleadings, Mr Marshall sought, shortly after the conclusion of the first hearing in June, to amend his pleadings to introduce a wider basis for Lexi’s case on want of apparent authority. At a further hearing on 8^th July I permitted Lexi to re-amend its Particulars of Claim, and adjourned the further hearing of the summary judgment applications to enable Pannone to respond by further evidence.

The result was a re-amended Particulars of Claim which included the following new paragraph:

“19A.2.(a) As set out at paragraph 15 above, Pannone knew or ought to have known that all monies related to the Company’s lending should be paid into the Receipts Account if not used to repay loans outstanding under the Facility Agreement. In the premises Pannone knew or ought to have known that Shaid was not permitted to give instructions to pay Company monies other than into the Receipts Account which payments would place the Company in breach of the facility Agreement. In particular Pannone knew or ought to have known that Shaid was not permitted to pay such monies into an account that they were aware or ought to have been aware was his own account. In the case of the Lloyds TSB account Pannone were so aware or ought to have been aware having been informed that it was not a Company account by Shaid by letter dated 22 October 2002. The Company will further rely upon the admissions to this effect contained in the first witness statements of James Farn and Jeremy Ingham herein.

(b)

Pannone were aware or ought to have been aware that Shaid was dishonest and that he had defrauded Barclays in respect of the Facility and knew or suspected that such frauds were continuing. The Company will rely upon the matters pleaded in paragraph 11 above.”

The result of that amendment was to introduce two new elements into Lexi’s case on want of apparent authority. The first was that Pannone knew or ought to have known that the Lloyds TSB account was Shaid’s personal account, so that he was not permitted to pay company monies into it. I shall call this “the personal account point”. The second was that Pannone knew or ought to have known that Shaid was dishonest, and that he had defrauded and was continuing to defraud Barclays. I shall call this “the dishonesty point”. Taking the view that Lexi was seeking to introduce both points into its summary judgment application, Pannone served substantial evidence in response to both.

At the resumed hearing in October Mr Marshall has made it clear that he sought only to rely upon the personal account point for summary judgment purposes, and not upon the dishonesty point. He said that the dishonesty point was just a defensive response to Pannone’s cross-application (now abandoned), and that it had never been put forward in support of Lexi’s own application. This misunderstanding between the parties has generated a lot of heat, but little light, and is relevant only to costs.

Mr Farn’s further evidence in relation to this point (in a witness statement made on 2^nd September 2009) may be summarised as follows. First, he reiterated earlier evidence that, to his recollection, the position in relation to the Lloyds TSB Account was rather nebulous, and pointed to documents in Pannone’s files suggesting, alternatively, that the account was Shaid’s personal account and “Pearl’s account with Lloyds TSB”. Secondly, he said that it never occurred to him that, merely because monies were paid into the Lloyds TSB Account, they were so paid for Shaid’s personal use and benefit, rather than for a purpose connected with Lexi’s business. He said that his understanding was that Lexi was, essentially, a one man company, funded to a substantial extent by money introduced personally by Shaid, such that he could see no reason why, without the benefit of hindsight, the Lloyds TSB Account could not properly have been used, for example, for repayment of Shaid’s loans to Lexi, and assumed that all such payments to the Lloyds TSB Account would in due course be reviewed by Lexi’s auditors. Since the company was, to his belief, Shaid’s, and appeared to be both profitable and fast growing, it never occurred to him that any conflict of interest between Shaid and the company was engaged by payment of company money into the Lloyds TSB Account, even if it was an account in Shaid’s name.

In response to Lexi’s reliance upon a letter to Pannone from Shaid in October 2002, stating that “the Company does not have an account with any bank other than Barclays”, Mr Farn said that he could not recall whether he had raised this with Shaid at the time. If he had not, it would have been because he was by then accustomed to the use of the Lloyds TSB Account, in his view legitimately, in connection with the company’s business. If he had raised it with Shaid, he assumed that he would have been given an explanation along the same lines.

It is in connection with the personal account point that the differences between the way in which Lexi’s case was alleged and proved in 2007 against Shaid and his family, and the way in which it is now put, take on real significance. Lexi’s original case, that the account was opened for and on behalf of Lexi, but then secretly abused by misappropriation from it, has a more than passing similarity with Mr Farn’s account of his understanding that, even if in Shaid’s name, it was used for the purpose of Lexi’s business, rather than purely for Shaid’s own separate benefit. Lexi’s original case therefore serves to confirm the view which I would in any event have reached from a consideration of Mr Farn’s further evidence, that the addition of the personal account point to Lexi’s case on want of apparent authority merely raises a triable issue, and therefore adds nothing to its case for summary judgment. By contrast, Lexi’s original case, based purely on the proposition that payments of redemption monies into the Lloyds TSB Account constituted breaches of the Facility Agreement placing Lexi in peril, is not in any way dependant upon a choice between Lexi’s alternative cases as to the status of the Lloyds TSB Account. Either way, it was plainly not the Receipts Account, nor indeed an account with Barclays.

I consider it plain that it is within the usual authority of the managing director of a company to give instructions to the company’s solicitors as to the payment of money held in client account on trust for that company. There is in general no duty upon the solicitors to make any inquiry as to the reasons for, or business judgments underlying, any such instruction. This is not therefore a case in which it is shown at the summary judgment stage that the instructions were, from Pannone’s viewpoint, clearly outwith the apparent authority of Shaid as managing director, for example because they involved the making of payments for his personal benefit, rather than for the benefit of the company. This was in fact the case, but it is a triable issue whether Pannone knew or ought to have known that. All that remains of Lexi’s case at the summary judgment stage is that the payment instructions, if complied with, would to Pannone’s knowledge involve Lexi in a breach of the Facility Agreements, so that Shaid’s instructions to make the payments might (rather than would) have involved him in a breach of his duties to the Company.

By contrast, all the authorities relied upon by Mr Marshall were, on their facts, examples of cases in which the facts known to the third party demonstrated beyond question that the agent had no usual or apparent authority. Thus, in Hopkins v. TL Dallas (supra), at paragraph 95, Lightman J said that:

“In my judgment the 1995 letters and their predecessors were abnormal transactions and the circumstances gave rise to suspicion as to the propriety of the conduct and the existence of the necessary authority to enter into them on the part of Mr Dana. The arrangements gave rise to unusual and onerous obligations which did not form part of the business of any insurance broker and Mr Dana and Mr Dwek knew this and that Mr Towey was acting in breach of fiduciary duty. In my judgment actual knowledge is plainly to be inferred. At the very least Mr Dana should so have known and, if he did not do so, can only have shut his eyes to the facts. In a word Mr Dana did not act in good faith in entering into the 1995 Letters and the 1997 Acknowledgement.”

Later, at paragraph 96, he continued:

“Even if I am wrong in holding that Mr Dana had actual knowledge, in my judgment Mr Dana was on the clearest notice that the transactions were both abnormal and suspicious and required confirmation of their propriety and regularity from Mr Colin Dallas, the Managing Director. This obvious step Mr Dana deliberately refrained from taking, and for this reason also he cannot rely on any claim based on the existence of ostensible authority on the part of Mr Towey.” (My underlining.)

That was therefore, on its facts a case of actual or Nelsonian knowledge of the fact that the act of the company’s agent fell outwith the ordinary business of the company, or of any company carrying on a business of that kind. It was a case in which the third party acted in bad faith, rather than merely carelessly.

Wrexham Association Football Club Limited v. Crucialmove Limited [2006] EWCA Civ 237 was another clear case of actual knowledge and, therefore bad faith on the part of the third party. Mr A D Hamilton and Mr M S Guterman were property developers who agreed in writing to obtain control of the claimant football club with the “main and sole objective to realise the maximum potential gain from the property assets of the football club for the benefit of ADH and MSG”. Pursuant to that objective Mr Guterman became chairman of the board of directors of the club and, in that capacity purported to commit the club to transactions designed to benefit himself and Mr Hamilton rather than the Club, with the defendant company, of which Mr Hamilton was the sole director. Both the judge, on a summary judgment application, and the Court of Appeal regarded it as beyond question that Mr Hamilton knew of Mr Guterman’s breach of fiduciary duty in committing the Club to a transaction for his and Mr Hamilton’s benefit, and that the defendant company had notice through Mr Hamilton of that breach. They concluded that Mr Hamilton had, beyond argument, acted in bad faith, notwithstanding that a disputed allegation of bad faith is normally suitable for determination only at trial. The written agreement as to the self-serving purpose for which they sought to obtain control of the Club put the question of bad faith beyond argument.

On those facts, there could be no doubt as to the absence of apparent authority in Mr Guterman, or as to Mr Hamilton’s knowledge of it. Nonetheless Sir Peter Gibson relying on dicta in Rolled Steel Products Holdings Limited v. British Steel Corporation [1986] Ch 246, said, at paragraph 45:

“Mr Freedman suggested that the board had held out Mr Guterman and Mr Rhodes to CL as having apparent authority because it had appointed him to the offices they held. I doubt if that is sufficient in relation to this transaction and in any event, for the reasons given in Rolled Steel, a third party put on notice, as CL was through Mr Hamilton, that Mr Guterman was entering into the transaction for an improper purpose and in breach of his fiduciary duty cannot rely on the ostensible authority of the officers concerned.”

Later, at paragraph 46, he continued:

“As was said in Rolled Steel at pages 284-5 by Slade LJ, the very nature of a proposed transaction may put a person on inquiry as to the authority of the directors of the company to effect it, even if he has no special relationship with the company. … CL was put on inquiry but no inquiries were made. CL cannot satisfy the requirement of good faith.”

The Rolled Steel case was about a guarantee and debenture given by the claimant to the defendant which was both unauthorised by the plaintiff’s memorandum and articles, and in breach of its directors’ fiduciary duties, to the knowledge of the defendant. As Slade LJ succinctly put it at page 296B to C:

“… the guarantee and pro tanto the debenture were not executed for a legitimate purpose of the plaintiff; Colvilles and British Steel Corporation knew it and, therefore, cannot rely on the guarantee and pro tanto the debenture. All this results from the ordinary law of agency, not from the corporate powers of the plaintiff.”

This conclusion on the facts immediately followed his statement of the relevant principle, at page 295H as follows:

“If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction.”

At page 307H Browne-Wilkinson LJ expressed the principle as follows:

“A third party who has noticeactual or constructive that a transaction, although intra vires the company, was entered into in excess or abuse of the powers of the company cannot enforce such transaction against the company and will be accountable as constructive trustee for any money or property of the company received by the third party.”

Later, at page 307D, he continued:

“But, as the judge and Slade LJ have demonstrated, British Steel Corporation had actual knowledge of facts which showed that the giving of the guarantee and the debenture was an abuse of powers by the directors of the plaintiff since the transaction was not even considered to be for the benefit of the plaintiff. The borrowing by the plaintiff from Colvilles of the £401,448 was formally invalid since such borrowing was not approved by a quorate board meeting of the plaintiff and the defence based on the rule in Turquand’s case, 6 E. & B 327 was neither pleaded or established. British Steel Corporation had constructive knowledge of this formal invalidity. Accordingly, British Steel Corporation and the receiver are accountable as constructive trustees for all the moneys of the plaintiff received by them with such notice.”

At page 309, in his usual trenchant way, Lawton LJ summarised the facts as follows:

“The scheme was designed to enable British Steel Corporation to strip the plaintiff of nearly all its assets and what was left over was likely to be successfully claimed by the Inland Revenue for corporation tax. Such a scheme, approved by the plaintiff’s directors on 22^nd January 1969, could not possibly have been for the benefit of the plaintiff, and British Steel Corporation, through their advisers knew that it was not.”

Rolled Steel was therefore again plainly a case where the third party knew that the transaction to which the agent committed the principal was outwith the agent’s usual or apparent authority. Nonetheless as Mr Marshall points out, two members of the Court of Appeal described the applicable principles in terms as much about notice and constructive knowledge as about actual or Nelsonian knowledge. Nonetheless, I do not consider that the Court of Appeal had in mind the different type of case, such as the present, where facts about a proposed instruction from the company’s managing director suggests a want of business prudence sufficient to give rise to a reasonable suspicion that the director may be acting in breach of duty, rather than to the certainty that he is. Nor were they concerned with a case, such as the present, where one explanation for the third party’s failure to make inquiry (which may or may not be established as the true explanation at trial) is negligence rather than a deliberate turning of a blind eye, or some other conduct amounting to bad faith.

Reckitt v. Barnett (supra) is as I have already described another clear case of actual knowledge on the part of the third party bank of facts which demonstrated beyond doubt that the agent’s instruction was outwith his apparent authority, and therefore affords no decisive analysis of the point of issue in the present case.

Proof that a solicitor paid money out of client account pursuant to an instruction from the managing director of a corporate client that he knew to be unauthorised is the plainest possible example of bad faith. So would be proof that a solicitor had abstained from inquiry out of a desire to avoid having a focused suspicion or belief that there was no authority converted into a certainty: see Lord Scott in Manifest Shipping Co Limited v. Uni-Polaris Insurance Co Ltd [2003] 1 AC 469, at paragraphs 112 to 116, and in particular the following passage in paragraph 116:

“In my opinion, in order for there to be blind-eye knowledge the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis for a finding of privity.”

That seminal analysis of the nature of blind-eye or Nelsonian knowledge was given in relation to privity to unseaworthiness for the purposes of section 39(5) of the Marine Insurance Act 1986, but was applied with approval by the Court of Appeal to cases of dishonest assistance and unlawful means conspiracy in Attorney General of Zambia v. Meer Care & Desai [2008] EWCA Civ 1007 at paragraph 21. It has yet to be decided whether it is applicable to an agency analysis in the context of apparent authority, but the repeated references in the cases to which I have referred to deliberately turning a blind-eye to the facts, and to constructive knowledge, suggest that it is at least well arguable that it may be.

The editors of Bowstead & Reynolds on Agency (18^th ed.) suggest in the commentary to Article 73 at pages 361-3 that the issue whether knowledge (actual or Nelsonian) or notice of facts calling the apparent authority of an agent into question is the correct criterion may be significantly affected by the context in which the issue arises. Viscount Dunedin said much the same at the beginning of his speech in Rickett v. Barnett (supra) at page 183. In Bowstead, a distinction is drawn between purely commercial transactions (where it is suggested that knowledge may be the appropriate criterion) and transactions concerning real property, where notice may be more appropriate. The present case is neither of those. The relationship here is between solicitors and their corporate client, in which the solicitors owe both duties of care and fiduciary duties, but where the smooth transaction of daily business nonetheless depends upon solicitors being able to act quickly and generally without procrastination upon the instructions of their client’s executive directors. There is, furthermore, a real distinction between knowledge or notice of facts which demonstrate that an agent’s instruction is clearly unauthorised (for example where it is for his own rather than the company’s benefit) and circumstances where the facts demonstrate only an apparent lack of commercial judgment in relation to an instruction otherwise apparently wholly concerned with the company’s business.

While I appreciate the real force of Mr Marshall’s main submission, that apparent or usual authority is an essentially objective question, depending upon whether the act or instruction falls within or without the representation of authority made by the principal, I am not persuaded that the authorities offer any sure guide, sufficient for the purposes of summary judgment, to the effect that a purely negligent failure to inquire about an instruction suggesting an underlying serious lack of commercial judgment by the director is sufficient to prevent a solicitor acting upon that instruction from relying upon the usual authority of the director, where the instruction in question, namely to pay a sum of money out of client account, is on its face squarely within that director’s usual authority.

Quite separately, the authorities do not show with clarity that conduct of the third party which (because it is purely negligent) falls short of that which can properly be given the label bad faith, is sufficient for Lexi’s purpose. If it is arguable that nothing short of bad faith will do (as I conceive it to be) then I satisfied that it would be wrong to make a finding of bad faith on the part of Pannone or of Mr Farn by way of summary judgment, this case being far removed from the clarity of fact which enabled the judge and the Court of Appeal to take the unusual step of reaching that conclusion in the Wrexham Football Club case. Mr Farn’s evidence, if accepted at trial, would clearly prevent a finding of bad faith, or knowledge (actual or Nelsonian) on his part, even if it may not of itself necessarily displace a finding of negligence, in his not making further enquiry.

Returning to the facts, my conclusion on issue (1) that payments of redemption monies into the Lloyds TSB account did involve a breach of the Facility Agreements by Lexi left open the real prospect that it might be shown at trial that it related to an obligation which to Barclays’ knowledge was more favoured in the breach than in the observance. The factual basis for the assertion that such payments therefore exposed Lexi to grave peril is itself therefore one fit for trial rather than for summary judgment.

For those reasons, although I have concluded in Lexi’s favour on issue (1), I do not consider it appropriate to give summary judgment on issue (2), in relation to the payments made by Pannone into the Lloyds TSB account.

I can deal with the payments made to other firms of solicitors much more quickly. On the largely admitted facts, these payments were made from a Lexi client account at Pannone which had been funded, not from redemptions, or repayments by Lexi’s customers, but from payments made from one or more Lexi accounts at Barclays. They were therefore payments by Lexi of its own money to Pannone, whether they came from its current account at Barclays, from the Receipts Account or any other account.

Mr Marshall submits that they were nonetheless payments received by Lexi under or in connection with the Bridging Finance Documents within the meaning of clause 10.2(b) of the November 2001 Facility Agreement, and the similar language of its successors. I am by no means satisfied that clause 10.2(b) had as its object payments made, not from Lexi’s Customers (as defined) which would be subject to the banks’ charge, but payments by Lexi of its own monies, out of accounts at Barclays. I can envisage how as a matter of pure language such an argument could be advanced, in the sense that the monies were paid to Pannone in contemplation of the making of a loan pursuant to Bridging Finance Documents, but such a wide-ranging construction would, as it seems to me, be apt to give rise to curious results.

The payments to other firms of solicitors were, on facts admitted or sufficiently proved for summary judgment purposes, made out of funds transmitted to Pannone in connection with contemplated loans to customers of Lexi in respect of which Pannone were instructed to act by Lexi. Instructions to pay to other solicitors (who Mr Marshall accepts may be shown at trial to have been panel solicitors) may reasonably be supposed to have been given so as to enable funds to be used, not for the bridging loan in respect of which Pannone were instructed, but for some other more urgent loan to a different customer, for which the recipient panel solicitors had been instructed by Lexi.

If that (far from fanciful) analysis were to be established at trial, it seems to me by no means clear why Pannone should have regarded the instruction to transfer the money to other panel solicitors as either abnormal or suspicious. Since on Pannone’s evidence, the detailed arrangements as to which funds were to be applied for lending to which customers were conducted by Lexi directly with Barclays, without involving Pannone, it seems to me at this early stage that there was no reason for Pannone to have assumed that any breach, or at least anything other than a purely technical breach, of the Facility Agreement might be involved.

It follows in my judgment that, even if Mr Marshall’s submissions as to the relevant law were entirely correct, the instructions to make payments to other solicitors came nowhere near a sufficient degree of abnormality or suspicion, for as long as Lexi’s pleaded case is based purely on the proposition that the relevant abnormality consisted only of a breach of the Facility Agreement. The personal account point does not of course apply to these payments.

As to the final category, namely the payment to Mr Denney, this was on the face of it a payment instructed to be made out of the proceeds of the enforcement of Lexi’s security rights against a defaulting customer under a bridging loan. It fell, therefore, prima facie within the requirement in clause 10.2 to make payment of all such receipts into the Receipts Account.

It was however a payment which, on evidence which may be accepted at trial, Pannone were told was to meet an invoice properly payable in connection with the very receivership which had produced those recoveries. It could therefore have been deducted by the receivers before payment to Pannone of the net proceeds of the receivership, in which case no complaint under clause 10.2 could have arisen.

Again, quite apart from the difficulties which I have described in detail in relation to the other claims based upon payments of redemption monies to Lloyds TSB, this particular transaction comes nowhere near demonstrating a case of want of apparent authority, based upon breach of the Facility Agreements, sufficient to warrant summary judgment. On Pannone’s case, the payment, at worse, short-circuited a process which, in strict conformity with the Facility Agreement, might have required payment first into the Receipts Account, followed by payment out to meet Mr Denney’s invoice. The claim in relation to this payment is therefore, for those reasons, unsuitable for summary judgment.

That is sufficient to dispose of Lexi’s application. Pannone’s cross-application has, as I have described, been abandoned. I will hear submissions as to an appropriate form of order.