Ackerman v Ackerman & Ors

This is an application for security for costs. It is made in litigation between, in effect, two camps of the Ackerman family and is one of several applications that I have heard in those proceedings. The litigation is being conducted with all the acrimony, mistrust and intransigence that can sadly be a feature of proceedings of that kind.

The claimant, Mr Joseph Ackerman (“JA”), and his brother, Mr Jack Ackerman, together built up a very successful business of property investment and development. The properties were largely held through a series of companies, but a few were owned personally. The business as a whole has been referred to as “the Ackerman Group” (“the Group”). The brothers also established a charity, Delapage Ltd (“Delapage”), which made substantial charitable donations over the years and which has two non-charitable subsidiaries, Haysport Ltd and Twinsectra Ltd, that have engaged in property investments. It is not in dispute that until the crash in the property market a few years ago, JA was a very wealthy man. JA has four children (all daughters) and his brother had five children.

In 1989, Mr Jack Ackerman died and his interests passed to his widow, Mrs Naomi Ackerman (“NA”). In the following years, the affairs of the Group were managed by JA with little involvement by NA. In 1997, JA and NA together established the Superetto group, which comprises a holding company (Superetto Ltd) and nine subsidiaries, one for the benefit of each of their children. In 2003, NA’s uncle established the NOF trust, which is a Gibraltar trust and which, it is now accepted by JA, is for the benefit of NA and her children as well as for himself and his children. As well as the Group itself, JA effectively managed the Superetto group and Delapage. The extent of his involvement with the trustees in the management of the affairs of the NOF trust is disputed.

By 2006 it was clear that NA no longer wished her interests and those of her children to be managed by JA. Accordingly, there needed to be a parting of the ways. By this stage, relations between JA, closely supported by his son-in-law Mr Danny Wulwick (“DW”), and NA, supported by her son, Mr Barry Ackerman (“BA”), had severely deteriorated. It is neither necessary nor appropriate in this judgment to give a full account of what then happened, and many of the details are in any event disputed. What follows is therefore a simplified summary. It is sufficient to say that the parties eventually reached agreement that Mr Andrew Thornhill QC, a tax barrister, should be engaged to give effect to a division of the Group between them so as to achieve a demerger of their interests. It appears that negotiation of the terms of the agreement were prolonged and contentious. NA and her side claimed that JA was removing assets for his own benefit, while JA contended that NA was also removing assets; and there were disputes as to the way various companies had been managed (at least since 2002) by JA. An initial agreement, entitled “An Agreed Way Forward” was signed in 2008, but was then replaced by a document called “A Revised Further Agreed Way Forward” dated 25 June 2009 which is now the governing agreement (“the Agreement”). Mr Thornhill is a party to the Agreement along with JA, NA, DW, BA and various jointly owned and Group companies.

The Agreement is detailed and gives extensive authority to Mr Thornhill to determine a lottery, allocating various companies and properties as between JA and NA so as to provide for a fair division of their “Respective Interests” (as defined), including the making of adjustment for so-called “Removed Assets.” He was also given a power of attorney by the Ackerman parties to act in their names as he “may in his absolute discretion think fit to secure the purposes” of the Agreement. Under the Agreement, Mr Thornhill was to issue a “Provisional Adjustment Report” setting out how he had decided to divide the Respective Interests as between JA and NA, making provisional adjustments in terms of cash payments, property or share transfers. However, for a period of up to a year after the Provisional Adjustment Report, Mr Thornhill could make revised or fresh adjustments that he would set out in his “Final Adjustment Report” that would take effect on the so-called “End Date”. The position thus arrived at as at the End Date was (subject to certain exceptions) expressed to be final and binding on the Ackerman parties in full and final settlement of their disputes concerning Removed Assets and other depletion of assets through the conduct of the affairs of the Group, the Superetto group.

Already by 2009, and following the collapse in the property market, most of the Group’s property investments had gone sour and many of the companies were severely indebted. In the course of his review process, in 2009, Mr Thornhill had directed the transfer to NA of the management of most of the properties held in the joint names of JA and NA. Then on 5 January 2011, Mr Thornhill issued his Provisional Adjustment Report (“the Ackerman Report”). Mr Thornhill recorded in his report that “[t]he animosity and lack of cooperation between the two sides has been such as to cause enormous delay.” Mr Thornhill determined that £20.33 million was owed by JA to NA and £9 million was owed to the Delapage subsidiaries that must come either from “jointly-owned companies taken by JA or from JA himself.” He then concluded that a 50/50 split of jointly-owned assets with adjustments either way, in the manner envisaged by the Agreement, was not possible. He directed that a new company should be formed into which the shares in the jointly owned Group companies and the Superetto subsidiaries should pass, and that JA’s interests in the jointly owned properties and certain other companies should be transferred to NA. Mr Thornhill stated: “I fully appreciate that a resolution of matters along these lines was not anticipated in the [Agreement].”

It is no exaggeration to say that JA was horrified by the Ackerman Report and what Mr Thornhill had done. He found that the entirety of the assets of the Group and the Superetto group were passing to NA. It is submitted on his behalf that the consequence of the Ackerman Report and Mr Thornhill’s actions have been “to deprive JA of all his interest in the family business to which he had devoted his whole life.” He contends that the Ackerman Report goes beyond the terms of what was permitted by the Agreement. Further, he was very concerned to learn that Mr Thornhill had been communicating with NA and her side prior to the issue of his report, and that pursuant to his power of attorney Mr Thornhill had removed assets into a new company established for that purpose prior to 31 December 2010, and thus before the issue of his report.

JA accordingly commenced proceedings on 20 April 2011, alleging a series of breaches of the Agreement as regards the scope of what Mr Thornhill was permitted to do, the procedure required and also a failure by Mr Thornhill to act fairly, impartially and in an unbiased manner. Many allegations of breach are pleaded and for present purposes I refer to only one. By para 47 of the Particulars of Claim, it is alleged:

“On the true construction of the Agreement, Mr Thornhill was not empowered to effectively dispossess JA’s children of their beneficial interests in the shares in the Superetto group companies, which were not to be allocated pursuant to the Lottery but which were rather to be allocated in accordance with the trust arrangements already referred to….”

JA contends that by reason of the various breaches and their fundamental nature, the Agreement is discharged and that insofar as NA, BA or the new company makes any profits by reason of the consequential transfers to them, they must account for those profits.

The claim is therefore brought against Mr Thornhill and NA, BA and the new company to which I have referred at paragraph 6 above. NA, BA and the company are jointly represented by Berwin Leighton Paisner and have for convenience been referred to in the present application as “the BLP defendants.” Mr Thornhill is separately represented. By their Defence, the BLP defendants deny all the breaches alleged against Mr Thornhill and thus that the Agreement has been discharged or that they are under any duty to account. They admit that Mr Thornhill was under a duty to act fairly, impartially and in an unbiased manner. NA and BA have also issued a Part 20 claim against Mr Thornhill in the event that their defence is unsuccessful.

By order of Newey J made on 4 May 2011, there is to be an expedited trial, which has now been fixed to commence in the week of 21 November 2011. It is therefore not an option on this security application to consider the provision of security up to only a certain stage in the proceedings (e.g. the conclusion of disclosure), as in some other cases. But it is relevant to have regard to the scope of the trial. It is not an appeal from Mr Thornhill’s determination in the Ackerman Report as to the Removed Assets or the extent of adjustment owed by one side to the other, and thus does not involve an examination of all that JA (and DW) are alleged by NA (and BA) to have done (or failed to do) over several years in the management of the various assets. The focus of the proceedings is on the proper construction of the Agreement, of course interpreted against its factual background, and then the manner in which Mr Thornhill conducted his assessment and reached the determinations set out in his Report.

This application for security is brought by the BLP defendants under CPR 25.12. There is no such application by Mr Thornhill.

CPR 25.13(1) provides, insofar as material:

“The court may make an order for security for costs under rule 25.12 if

(a)

it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b)

(i) one or more of the conditions in paragraph (2) applies…”

The condition here relied on is 25.13(2)(g) which states:

“the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.”

Thus the making of an order for security (and therefore if any, its amount) is discretionary and for such an order here to be made:

The general principles that govern the making of an order for security and the application of CPR 25.13(2)(g) are well-recognised. They include the following:

In this case, it is accepted by JA that the condition in sub-para (g) for the making of an order is satisfied. That is, in the first place, because of the transfer by him of his half-interest in the matrimonial home, 38 Green Lane, Hendon, to his wife on 30 November 2010. Secondly, it was accepted in the course of the hearing, although not in advance, that the condition is satisfied by a transfer made on about 7 June 2011 of about £348,500 to Hassans, a solicitors firm in Gibraltar who advise and wholly own the Company which acts as trustees of the NOF trust and also of the White Star trust to which I shall refer below. These monies came to JA as payment for his assistance to Remax Harborne Ltd (“Remax Harborne”) on property related matters in a claim brought by them against their former solicitors. It seems that monies were paid by Forsters LLP, who acted for Remax Harborne on that claim, direct to Hassans in Gibraltar on JA’s instructions. JA says, and it is not disputed, that these monies were subsequently remitted back to the UK to pay his solicitors, first by a payment of £140,000 sent on about 21 June, and subsequently by sending the balance; and that most of the money has now been used to pay JA’s legal costs of both the present action and separate proceedings commenced by NA against him for forgery. Accordingly, JA no longer has this money.

JA has offered, with the consent of his wife, that there should be a charge by way of security over half her interest in 38 Green Lane. The BLP defendants obtained a “desk-top” valuation of the property, which is unencumbered, in the amount of £750,000. Although they initially suggested that a first charge did not provide appropriate security, I was not impressed by that argument which was not persisted in. Accordingly, there is no real issue that the BLP defendants should have security in that form which currently amounts to around £375,000. However, they contend that this is inadequate as it is very significantly less than their estimated trial costs. They submit that it is to be inferred that JA either has assets abroad which he has failed to disclose or that he has available other sources of financial support for this litigation. They submit that JA has not made a full or frank disclosure of his assets and financial arrangements.

In my view, it is appropriate to consider first the motivation for the two transfers that incontrovertibly constitute steps removing assets within sub-para (g).

As regards the matrimonial home, JA says that this was done by way of tax planning because of his concern about the possible introduction of a wealth tax by the new coalition government, following discussion with his accountant, Mr Brian White of Deloittes, and that accordingly no adverse inference should be drawn from this regarding his placing assets out of the reach of creditors.

I am rather sceptical about this explanation. JA has lived in and owned the property jointly with his wife for over 30 years without making any such transfer. As Mr Wardell QC for the BLP defendants pointed out, the transfer was made some 6 months after the general election at a time when the suggestion of a wealth or mansion tax was no longer being pursued. I note also that JA did not produce any confirmatory letter from Mr White regarding the advice. However, I am prepared to accept that the transfer may not have been motivated by the anticipation of Mr Thornhill’s report, on the basis that JA did not expect that the report would reach the conclusions which it did.

As regards the Remax Harborne monies, the BLP defendants became aware of the remittal of £140,000 to the UK from Hassans because a bank payment advice was erroneously sent to a fax machine at a company owned by NA and BA. JA explained this remittal in his first witness statement on the basis that he had intended “to lend the sum of £140,000” (out of about £350,000 which he disclosed as the payment received from Remax Harborne) to Star Poland Ltd (“Star Poland”) and thus sent it to Hassans in anticipation of that loan being made. He indeed complained that the BLP defendants were making use of private information that had been sent to them in error. Only in his second witness statement, made the day before the hearing of this application, did JA reveal that the full amount paid by Remax Harborne had in fact been transmitted to Hassans.

Star Poland is a BVI company and one of the subsidiaries of the White Star trust, a Gibraltar trust that was established on 3 April 2008. It is accepted by JA that this trust is for the benefit of his side of the family, and in particular his children. Star Poland is engaged in a property development on an industrial site in Łodz, Poland. One of the Superetto group companies of which JA’s daughter is a beneficiary had made a loan of £5.8 million to Star Poland in December 2007 for the purpose of funding that development. JA said in his first witness statement that the development was at a standstill through lack of sufficient funding because of the depressed state of the Polish property market. He said in his second witness statement that the intended loan from the Remax Harborne monies was to enable Star Poland to carry out necessary demolition works (apparently there are old industrial buildings on the site) which would result in a saving on building tax.

However, JA and DW have also been receiving, until very recently, together £240,000 a year in consultancy fees from Star Poland for, he says, management input into the development, for which they travel regularly to Poland to meet developers, potential purchasers, funders and so forth. Confronted with the need to explain where this money came from, JA said in his second witness statement that Star Poland retained an unused cash balance of £604,000 out of the £5.8 million loan. That of course raises the question why Star Poland then needed a loan of £140,000 from JA. By way of answer, JA said this:

“I was proposing to use part of this money [ie the £350,000 received from Remax Harborne] to lend to Star Poland so that it could carry out necessary demolition works which would in turn result in a substantial saving on building tax. Although Star Poland has the funds with which to pay for the proposed works, it was felt that its interests would be best served by obtaining short term funding for a rates mitigation programme (of which the demolition work would form part) and funds which I was proposing to make available would act as bridging finance pending such short term funding being in place.” [my emphasis]

That was amplified in a further witness statement from Mr Marino, a partner in JA’s solicitors, served during the course of hearing, which stated that the objective of Star Poland is to obtain planning consent for residential apartments and then (if successful) proceed with that redevelopment, and that the £604,000 is by some margin insufficient to cover those stages, which will require external funding of which a condition will be an injection of money by Star Poland itself. It is to be inferred that the £604,000 was being retained by Star Poland for that purpose.

However, no distinction is there made between the planning application stage and the development stage, and it is almost self-evident that the former will be much cheaper. Why Star Poland could not itself have provided any bridging monies and later sought further funds from JA if and when the planning stage was launched is unexplained. Further, Mr Marino’s witness statement reveals that external funding has been obtained for the initial demolition stage, evidently without the need of a £140,000 bridging loan from JA. In addition, there is the question why JA remitted the full £348,500 to Gibraltar when Star Poland’s “borrowing” requirement was only for £140,000. Mr Marino says that in fact £140,000 covered only the “first stage” of the demolition works so the full sum was transmitted “in the expectation that the balance would also be used as bridging finance for the next stages of the proposed demolition works which would take place in a matter of days or weeks after the first stage.”

Given that this transfer was made several months after the issue of the Ackerman Report, and indeed after the commencement of this claim, I find this explanation, which emerged only piecemeal and responsively as the inadequacies in each previous account were pointed out, very strange. What makes it still more unsatisfactory is the revelation, again in the witness statement served during the course of the hearing, that the Polish development is in fact a joint venture between Star Poland and a group of Israeli investors, carried out through a Cyprus company, Lensbest Holding Ltd. Star Poland has only a 50% interest in the development, which therefore raises the question why it was only JA, not the JV partners, who was providing these loans. While I accept, as already indicated, that the Remax Harborne monies came back to England and have been spent on legal fees, I am left with the pronounced impression that JA has been less than frank about this whole arrangement. I find the reasons given for the initial transfer of those monies directly to Hassans unconvincing and that the explanation of the interest in, and object of, the substantial cash balance held by Star Poland is incomplete.

In the light of that, I do not find it necessary to consider the many other points taken by Mr Wardell in his exhaustive examination of the evidence. Some of the aspersions cast regarding JA’s affairs based, for example, on rumours in press reports regarding JA’s involvement in other development projects (which JA firmly denied) or on scrutiny of his tax returns, appeared to me very speculative or unpersuasive.

Reliance was also placed on Mr Thornhill’s report to the effect that JA and DW had been evasive regarding the affairs of the NOF trust, and indeed on the underlying financial dealings involving the various Ackerman and Superetto Group companies that formed the basis for Mr Thornhill’s report. However, I am very conscious that those matters are strongly contested by JA and it would have needed a hearing even longer than the 2½ days devoted to the present application to consider fairly the various allegations and counter-allegations regarding a complex history of transactions, which generated further evidence in the course of the hearing. I do not think it would be appropriate to reach even a provisional view on those issues. Nor do I consider that this is a case where I am in a position fairly to assess, on the evidence currently before the court, the claimant’s prospect of success in his claim.

Since the entire basis of JA’s evidence is that he does not have any significant assets or income, beyond some £80,000 that is now in his bank accounts, the question of whether to order security above the charge on 38 Green Lane, and if so in what amount, depends on consideration of (a) what that claim should reasonably cost, (b) what the recoverable costs of the BLP defendants is likely to be, and (c) the resources to which JA has access.

The costs of JA’s claim

The Court has been provided with a schedule of JA’s actual and estimated further costs of this matter, prepared by his solicitors. This shows his costs of the period to 30 June 2011 as a little over £400,000, which have been paid or are covered by funds held on the solicitors’ client account. As regards further costs to the end of trial, it is stated that these are estimated at £1.1 million (including VAT). Moreover, these costs are on the basis that JA’s solicitors have stated that they are acting on a “low fee” CFA, under which they are charging significantly less than their usual hourly rates.

I have to say that I find these costs extraordinary. The trial estimate is 8-10 days and no expert witnesses are involved. I have referred above to the scope of what is actually in dispute at the trial. I baulk at the suggestion that a trial of that nature reasonably requires the claimant to incur legal costs of £1.5 million, even at full rates, let alone on the basis of a reduced fee CFA. I note, for example, that the schedule of costs estimates that 888 hours will be required for work on disclosure and inspection, and of those it is envisaged that 352 hours will be spent by partners. By contrast, the schedule prepared by the BLP defendants in support of this application, shows only 290 hours in total for work on disclosure (most of it at more junior level). Similarly, I note that as regards witness statements, JA’s solicitors estimate that of the 410 hours required, well over half will be conducted by partners.

I do not regard that as a proportionate way to conduct litigation and I therefore do not accept that if by an order of security JA is prevented from expending a further £1.1 million on his case his claim is likely to be stifled. On behalf of JA, it was pointed out that the BLP defendants’s schedule also shows total costs of £1.5 million. However, not only is that not on the basis of a reduced cost CFA but, in any event, I do not regard that as a proportionate figure either. It is always possible to pour additional money into the conduct of litigation but that does not make it reasonable. Doing the best I can in the light of the evidence and having regard to the nature of the trial, I consider that a further £800,000 should clearly enable JA to take this case through trial on the basis of the CFA: that will mean total solicitor-and-own-client costs of over £1.2 million which is still a huge sum and, in my view, a generous, estimate.

Apart from the balance in his personal accounts to which I have referred, JA says that one son-in-law (a Mr van Dijk) has agreed to advance him £750,000 towards his legal fees. In that regard, the costs estimate put forward on his behalf is surprising because it means that if it were correct, on his own evidence he would currently be unable to take this case through to trial. Mr Wardell points to that as showing that JA must have other sources of funding. Mr Orr QC, for JA, said that his client is obviously aware of the deficiency and may need to ‘cut his cloth’ accordingly. On the approach that I take, with the loan from his son-in-law JA will be able to cover his costs from identified funds. I do not include in these costs the further expense of interrogation of a laptop by an IT expert, that was the subject of a separate application before me: as I indicated in the course of that argument, the need for that interrogation was not very clear and I am therefore not prepared to take account of those additional costs if JA chooses to incur them.

I should add that there was reference in the evidence to the further costs JA faces in meeting the forgery claim brought by NA, but I was informed that it has now been agreed that no further steps will be taken in those proceedings until after the trial of this action.

Costs of the BLP defendants

I have observed that in my view the BLP defendants’ estimate of costs through to the end of trial of £1.5 million is also disproportionate, and of course if successful they would only recover assessed costs. Mr Wardell recognised that the court would not order security in the total amount and submitted that £950,000 would be an appropriate figure. In my view that is still significantly above the total proportionate costs that the BLP defendants might expect to recover. I consider that for costs on a standard basis £800,000 is a reasonable estimate for a trial of this nature.

Resources available to JA

As set out above, it is necessary to consider not only the claimant’s own funds but assistance that he might obtain from others. In that regard, for an individual claimant his family is always a relevant consideration, but in this case I consider there is a particular reason why JA’s family can reasonably be expected to assist. Prior to the transfer of his UK property assets by Mr Thornhill, JA says that he derived an annual income of some £250,000 before tax. He states that he would “typically spend a significant proportion of this income on living expenses, children, grandchildren and charity donations.” However, as he points out, he did not live an opulent lifestyle and it seems clear that his children (all now grown up) and their families have greatly benefited from his munificence in the past. Since JA has on his own evidence, and like many other wealthy individuals, been alert to the opportunities for tax planning, it can be assumed that his children would have benefited from capital provision as well as payments out of his annual income. Hence, the four Superetto companies transferred to NA following the Ackerman Report were established for the benefit of JA’s daughters. Therefore, they have a direct interest in the outcome of this litigation, and DW is very actively assisting his father-in-law in the preparation of the case. JA indeed described the reaction of his children as follows:

“They are very angry that the shareholdings in the Superetto companies have been transferred to the BLP Parties and are no longer in my control. They are concerned that they will lose the inheritance that has been earmarked for them since 1997.”

JA said in his first witness statement made on 20 July 2011 that he has been in discussion with his children with a view to raising funds from them; and that apart from the £750,000 advanced by Mr Van Dijk, who has a successful business in Switzerland, his children “are still considering their position as at the time of this Witness Statement.” Nothing further was said about this in JA’s second witness statement made a week later, so it seems that they are still considering their position. JA notably does not say that they lack the means to help if so inclined (by contrast with what he says regarding specifically his other sons-in-law). I know nothing about his daughters’ financial position, save that from the evidence before the court on the separate application in this case concerning the laptop, it is apparent that at least one daughter owns some property that was being managed out of JA’s office.

The difficulty as to what the court should do in a case such as this where it considers that a claimant has access to more funds than he is prepared to reveal but cannot determine how much, was addressed by the Court of Appeal in Al-Koronky as follows:

“28.

… the court, once satisfied that the case is one in which the claimant ought to put up security for the defendant's costs before continuing with his action, is going to find itself in one of two situations. Either it will be satisfied that it probably has a full account of the resources available to the claimant, in which case it can calculate with reasonable confidence how much the claimant can afford to put up; or it will not be satisfied that it has a full account, and so cannot make the calculation. Does it follow in the latter situation that the court must go straight to the amount sought by the defendant and, having pruned it of anything which appears excessive or disproportionate, fix that as the security? Or is there a middle way - for example to set an amount which represents the court's best estimate of what the claimant, despite having been insufficiently candid, can afford?

29.

In our judgment there is such a power, but it resides in the court's discretion rather than in legal principle. In the second situation we have postulated, the requirements of the law have been exhausted: what remains is to set a suitable sum. This classically is where discretion fills the space left by judgment: the court has a choice of courses, none of which it can be criticised for taking provided it makes its election on a proper factual basis uninfluenced by extraneous considerations.”

Here, the husband of one of JA’s four daughters has advanced a significant sum. Lacking any information regarding the financial position of the other three, but having regard to the circumstances referred to above, I consider each could be expected to provide or raise £75,000 as a reasonable sum to assist litigation on this scale by their father from which they will benefit substantially if it is successful. Even if that proved difficult, I note that JA’s wife, who will presumably also benefit significantly from a successful outcome, apart from the matrimonial home owns a property in the south of France which JA estimates is worth about €400,000. And that is without assuming that the daughter whose Superetto company was the source of the Star Poland monies might be able to direct that part of that money is advanced to JA.

Those considerations provide a basis for funding of a further £225,000. I have considered whether to order a higher figure but in the end I consider that a total of £600,000 by way of security is a fair and appropriate amount in all the circumstances to do justice as between the parties. In reaching that view, I have also had regard to two other factors. First, a letter was received by JA’s solicitors on 29 July, the second day of this hearing, from solicitors for the subsidiaries of Delapage, notifying a claim of almost £4.1 million against JA. I see no basis for the suggestion advanced by Mr Orr that the BLP defendants may be behind this, as a way of putting additional pressure on JA. The Charity Commissioners intervened in the affairs of Delapage in about October 2010 and appointed interim managers, who would presumably be responsible for the conduct of Delapage’s subsidiaries. But this is clearly a claim that JA will have to address and therefore requires additional legal expenditure. Secondly, if all the Ackerman and Superetto group assets had not been transferred away from him by Mr Thornhill, JA would presumably not face the same difficulty in raising funds. Therefore this is a case where the claimant’s lack of means has been contributed to by the defendants in a manner that is at the heart of the claim.

Accordingly, I shall order JA to provide security in the sum of £600,000, of which £375,000 may be furnished by way of a first charge on 38 Green Lane. I shall hear counsel as to further directions regarding timing and the form of the balance of the security.