E-Clear (UK) Plc v Elias Elia & Ors

JUDGE MACKIE: This is an application by the claimant, E-Clear (UK) plc in administration, dated 13 October 2011 for, in substance, summary judgment against the third defendant, Mrs Elia. In the ordinary way, the application would have been completed within two days and judgment given. Just over half of the first day was occupied by the third defendant’s unsuccessful application to stop the claimant’s solicitors, Field Fisher Waterhouse, from continuing to act. The claimant is represented by Ms Addy of counsel, instructed by Field Fisher. The third defendant is represented by Mr Crystal and Ms O’Kane of counsel under the direct access scheme.

There is a variety of bundles before the court and also a significant body of evidence. There are four witness statements from Mr Jarvis, the claimant’s solicitor, and another witness statement from a colleague of his. There are five witness statements from the third defendant. There is one from her son, the first defendant, Mr Elias Elia. There are two witness statements from her former solicitor, Mr Middlemass, and there are also witness statements from Mr Zolotas and Mr Shiammoutis.

The action began as a claim by the claimant against the first defendant, Mr Elias Elia, for loss and damage caused by what were allegedly his breaches of fiduciary duty as a director of the company in administration. Things have moved on. There are currently three defendants. A bankruptcy order was made against the first defendant, Mr Elia, on 27 April and the court has determined, through Master Price, that he should take no further active role in the claim. The second defendant is Mr Elia’s trustee in bankruptcy and he has reached a settlement agreement with the claimant and consents to an order being made of the kind now sought.

I turn next to the facts agreed or not much in dispute. The claimant was incorporated as a plc in August 2002. It has a share capital of £50,000 held by a Cyprus company, E-Clear Global Limited, as to most of the shares and as to £1 by Mr Elia. The company was placed in administration pursuant to a creditor’s application by Mr Justice Vos on 19 January 2010. The administration appointed Mr Cohen and Mr Nygate as joint administrators.

The business of the company was providing payment processing services to merchant customers largely in the travel sector. The company acted as a middleman between cardholders and the credit card networks requiring banks to charge a fee to the merchant for each transaction it processed. The company used another company, Pago, a joint venture between German companies, as its acquiring and payment processing providing. Pago authorised and paid each credit card transaction. The company became liable to indemnifying Pago for any charge of liabilities arising in respect of its merchant customers’ transactions, those charge backs arising either where cardholders disputed the charges on their statements or where services paid for using the credit cards were not provided.

In 2008, two of the companies’ main customers, Zoom and XL Leisure, became insolvent. As a result of that insolvency, those companies’ customers claimed refunds for flights and bookings and the company became liable to Pago for charge backs to the tune of some £57 million. The company did not have sufficient retention monies from Zoom and/or XL to enable it to meet the liabilities. According to the administrators, the company became unable to pay its debts as and when they fell due. After a winding up petition was presented by one of the company's customers, this administration order was made. The third defendant disputes to some extent the perception by the administrators of the claimant’s business.

Indeed, the claim is for proprietary remedies in respect of payments made to or for Mr Elia’s benefit in what is said to be breach of his fiduciary duties as a director. There are proprietary claims made in the amended Particulars of Claim one of which, to the beneficial interest in a leasehold property known as 29 Rutland Court, Rutland Gardens, Knightsbridge is the subject of the application. The other claims do not arise today.

So, why is Mrs Elia a defendant to this case? Mrs Elia is the mother of Mr Elia and the flat which is at the centre of the application is, she says, hers. She says she bought it for some £25,000 from her son in circumstances to which I shall return.

The statement of claim alleges breaches of fiduciary duty against Mr Elia as I say. It is claimed that he caused payments listed in the schedule to the Particulars of Claim to be made from the company’s funds to himself or otherwise for his benefit. One of the items which is said to have involved a breach is 29 Rutland Court. The company says it is the beneficial owner of this property and it relies upon a series of events which are documented and, as transactions, are not, I think, in dispute.

It seems that in January 2009, Mr Elia agreed to purchase this flat for £4 million. A 10 per cent deposit of the purchase price was required and this was paid. It was paid by a CHAPS transfer from the company’s business current account with the Royal Bank of Scotland in tranches of £200,000 and £225,000. There is correspondence showing the conveyancing process and a mortgage was obtained but a balance of £993,741.10 was required from Mr Elia to complete the purchase. This too was provided by CHAPS transfer from the company’s business account at RBS. The claimants say this was used by Mr Elia as part payment for the purchase of the property. There was also a charge created on 5 March 2009 in favour of Coutts Finance registered against the property which appears to make up the difference between the purchase price and the sums apparently advanced from the company’s money.

When he was an active defendant to the claim, Mr Elia denied the allegations made against him and his response is conveniently set out in the defence, also settled on his behalf by Mr Crystal. In that defence, Mr Elia admitted the introductory part of the Particulars of Claim recording the insolvency of E-Clear:

Mr Elia went on in his defence to raise other matters pertinent to this application. For example, paragraph 7 provides in relevant part:

In paragraph 12 of his defence, Mr Elia says this:

There was a reply to the Defence and two paragraphs, responding to what Mr Elia had to say about the €5 million loan and the €1.9 million transactions are relevant:

Accordingly, paragraph 7.1 is denied. At 7.2:

The third defendant, when advised by Cyprus lawyers, put in a defence which has been superseded by what is now sought to be introduced as a draft amended defence. The first document reached court but, for whatever reason, was not drawn to the attention of or served upon the claimant. The claimant was unaware of it and, originally applied for judgment in default of the defence. The application became one for summary judgment when it emerged that a defence had been put in.

There is a lengthy draft amended defence which deals with what are said to be inaccuracies in the claimant's witness statements, and in the Particulars of Claim. The defence relies upon the matters which I have already mentioned in terms of the loans and also summarises some other points in three paragraphs.

As a result of the payments made to or for the benefit of the company by Mr Elia, Mr Elia will aver that at all material times he was a creditor of the company and any payments made to him or for his benefit were in discharge of sums due to him.

If it be alleged that all or any of the payments to or for the benefit of Mr Elia constituted a preference since the company was, at that time, insolvent, Mr Elia will aver that by reason of the transaction described above, this amounted to a repayment of any sums paid to him by the company which might otherwise constitute a preference.

It is alleged and averred that any payments to Mr Elia or for his benefit were not made so as to put him in a better position than he would be in the event of an insolvent liquidation because he was confident at all times that insolvent liquidation would be avoided since he had reasonable grounds for believing the company would be re-financed by Marvin Beck or another bank with the assistance of Mr Zolotas.

So, the issue is whether the claimant has shown that the third defendant has no real prospect of success. The claimant claims that there should be summary judgment relying on six points.

First, the claimant says that the property was purchased using £1,418,741.10 of the claimant’s funds. Secondly, the payments made comprised 35.5 per cent of the total purchase price of the property which is the percentage being sought in an order which I will come to. Thirdly, the use of the claimant’s money by Mr Elia to purchase the property was a breach of his pre-existing fiduciary duties to the claimant. Fourthly, the claimant retained an equitable interest in that money and can trace the same into the property, since from its acquisition, the claimant owned a corresponding beneficial interest in the property. Fifthly, even if any money was accepted or found to be owing to Mr Elia from the claimant, no previous or subsequent liabilities owed to Mr Elia could be set off against the claimant’s proprietary claim in respect of property. Finally, no registered disposition for valuable consideration has been made in respect of the property in Mrs Elia’s favour. Accordingly, no claim by her to any interest in the property can gain priority over the claimant’s pre-existing beneficial interest.

Mrs Elia resists summary judgment. She submits that there needs to be a trial to resolve what are crucial disputed facts. These issues can only be resolved by live evidence and a trial is, therefore, essential. Her case is set out in two skeleton arguments submitted by counsel. In the first of these, the emphasis is upon the fact that it is unsurprising the third defendant, who is the first defendant’s mother, should have acted in the way that she did in obtaining the assignment. Reliance is placed upon the fact that, according to the evidence of Mr Middlemass, monies were borrowed, as alleged in the defence, and disputes about those loans are quintessential matters for resolution at a trial, not on a summary judgment basis. The defendants place emphasis on the allegation that the accounting records relied upon by the claimants are wrong. They are not consistent with the underlying Sage accounts. Mr Elia had the right and power to transfer that which was not bought with the company’s money. Moreover, the company was not in truth insolvent at all. Mr Elia was owed money by the company and he is entitled to set it off.

I remind myself, when reviewing the evidence and the competing submissions that summary judgment can only be granted to the claimant if it can show that the defendant has no real prospect of defending the claim. I was taken to the guidance of the then Lewison J in EasyAir Ltd v Opal Telecom Ltd[2009] EWHC 339 (Ch). That follows, understandably, earlier guidance given by the same judge in The Federal Republic of Nigeria v Santolina Investment Corporation[2007] EWHC 437 (Ch) in passages which had the later approval of the Court of Appeal and which I keep on the Bench.

The judge summarises the relevant considerations as follows:

Turning then to the six steps which the claimant appears to recognise need to be satisfied if it is to show that there can be summary judgment in this case. The first is, as I said, the contention that the flat was bought with the claimant’s money. It is clear from the exhibits that the flat was bought with the company’s money albeit that it is contended on behalf of the defendant that it appears from the Sage account and is now clear that the money used to purchase the property was not the claimant’s money. I will come to why it is said not to be the claimant’s money. So, the first requirement is met. The second requirement is that the payments made from the claimant’s money comprised 35.5 per cent of the total purchase price of the property. That is common ground. It is a matter of simple mathematics that the 1.4 million is 35.5 per cent of the 4 million-odd, the flat cost.

The third matter is the claimant’s claim that the use of the company’s money by Mr Elia to purchase the property was a breach of his pre-existing fiduciary duties to the claimant in respect of that money. Ms Addy points out that Mr Elia was a director of the company and owed fiduciary duties under sections 170 to 177 of the 2006 Act. She focuses in particular on the pre-existing and continuing fiduciary duty not to use the company funds for any improper purpose and to avoid conflicts of interest. Those are admitted as duties, but the defendants contend that when one examines the facts they are not made out or certainly not made out to the extent necessary to justify summary judgment. Ms Addy also points out by reference to the West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA) and Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd[2002] EWHC 2748 (Ch), [2003] 2 BCLC 153 cases that it is well established that when a company is insolvent or of doubtful solvency or on the verge of insolvency, the directors must consider and act in the best interests of the creditors of the company. The interests of the creditors means the creditors as a whole not any individual creditor or class of creditors.

Ms Addy contends that it is clear from the matters set out in the evidence that the claimant was either insolvent or of doubtful insolvency or on the verge of insolvency at the time in February 2009 when the company’s money was used to buy the flat. She relies in particular on the following matters, which are set out in the witness statements of Mr Jarvis and evidenced by the documents upon which he relies. She points out that two of the claimants major customers had recently gone into formal insolvency process. The claimant was incurring charge back liabilities of the order of £57 million. It did not have enough money to meet those huge charge back liabilities. It did not have sufficient insurance cover to meet them.

There is internal evidence, in particular an email from a Mr Vanezis in December 2009, which shows the company had not been meeting its own tax liabilities for at least a year. The draft management accounts in February 2009 showed that as at the end of that month the company had a net asset deficit of over £28.6 million and net current liabilities of more than £46.6 million. Reliance is placed on the first defendant’s defence, where he appears to suggest that the claimant would only avoid insolvent liquidation if the company could be refinanced by a third party. No such refinancing had been secured.

Ms Addy contends that it is clear that at the time the funds were used by Mr Elia to buy the flat in his own name, he recognised that the claimant did not have enough assets to meet its liabilities and was in financial trouble. She points out that it is, as a matter of law, immaterial whether or not Mr Elia believed the claimant could escape those liabilities.

The third defendant, through her witness statement and those of the other witnesses to which I have referred, disputes that the company was insolvent as alleged. In the course of the hearing a new balance sheet, as a February 2009, was produced. This is a document heading E-Clear Balance Sheet as at February 2009. It includes investments of Allbury, NF Bank and Mendark, which are valued for the purposes of the draft balance sheet at £104.74 million. A discount is taken for that by 20 per cent for a forced sale value, giving investment value of £83.79 million. This leads to fixed assets of £95.84 million and in turn to current assets, which are put at £43.40 million and it is said that these were going to improve in the ordinary way to some £83.4 million, giving without that improvement, a net asset value of £58.75 million.

The valuation of the investments is said to be supported by documents. But these documents are very thin evidence of value. When I asked Mr Crystal from time to time how they made out the case for this new balance sheet, he repeatedly referred me back to the third defendant’s third witness statement and to paragraphs 6 and 7 in particular. I will not read out paragraph 6, because it is 2½ pages long and very densely argued and quite hard to follow. But relevant parts of paragraph 7 say this:

Neither those paragraphs nor the evidence as a whole appear to me to begin to provide legitimate justification for this new draft balance sheet. There would need to be really firm evidence to establish a new and very different balance sheet after so long. That would be so in any circumstances, but all the more so given the fact that the source of Mrs Elia’s information and the person responsible for preparing this new document is Mr Elia.

On 26 June 2009, Mr Elia swore a witness statement in support of an application in which the defendant was involved in the Commercial Court. Like all witness statements it must be read as a whole, but in the interests of brevity, I refer to only some parts. In paragraph 4 he says:

That exhibit gives a picture dramatically different from the one which is now put forward on behalf of the third defendant. There is a reference to a £10 million deposit with the Royal Bank of Scotland, held as security, which is it not possible for the company to obtain any payment in respect of, except by providing alternative security on an equal or greater amount. Debtors are listed at £10.468 million. The absence of overdraft facilities referred to and it is stated that the company suffered approximately £57 million of losses. It is said that all money generated through credit transactions is received and held in accounts in the company’s name. Pago demanded payment of monies equivalent to the charge backs and if the company did not pay the charge backs Pago would have stopped processing for the company and would have retained all money which came due to the company. He states that the business is profitable going forward and for that reason he has sought financing. He refers to the great efforts he has been making in that regard.

When one looks at the exhibit and the witness statement, it is quite clear that Mr Elia was painting, under oath and close to the relevant time, a picture of the company’s insolvency quite different from that which is now put forward. This late ill-documented and unsubstantiated draft balance sheet, unverified by any accountant at all, sets out a position which is also commercial improbable, given the business realities set out in the documents. It is also directly contradicted by the sworn testimony of the very person who is responsible for its preparation. It seems to be a good illustration of what the word fanciful means.

It is further submitted by the claimant that, even if any liabilities were owed to Mr Elia, prior to the purchase of the property, given the claimant’s financial circumstances, it could not be conceivably considered to have been in the interest of the creditors as a whole to purchase the property in Mr Elia’s name. Mr Elia cannot have had any proper or due regard to the factors specified in section 172 of the Companies Act. She also says that given the claimant’s financial situation at the material time, it is irrelevant whether the claimant then owed any monies to Mr Elia. She submits that it is clear that the payments were made solely for the purpose of purchasing the property and were not made to Mr Elia in circumstances of necessity on the part of the claimant or otherwise in furtherance of the interest of the claimant and/or its creditors as a whole. Moreover, she submits that the claimant’s continuing proprietary claim to the money cannot be set off against any personal liabilities in debt, which might have been owed to the first defendant.

Reliance is placed on the Guinness plc v Saunders[1990] 2 AC 663 case and on Lehman Brothers International (Europe) No.2 reported in 2009. As a matter of law, those propositions, if not common ground, are not the subject of serious challenge. Moreover, she submits that it is well established that claims against directors in breach of their fiduciary duties cannot be set off either in equity or pursuant to the insolvency rules and relies upon solid authority, Manson v Smith (liquidator of Thomas Christy Ltd)[1997] 2 BCLC 161 and Smith (Administrator of Cosslett (Contractor) Ltd) v BridgendCounty Borough Council.

That then raises the question of the loans, which Mr Elia says he made to the company. There appears to be no contemporaneous mention of loans being made by Mr Elia in the documents apart from limited entries in the Sage accounts which may not be contemporaneous. I have referred to the pleaded accounts of these alleged loans. The third defendant says that the money used to buy the flat was paid in discharge of sums due to Mr Elia. The sums are a payment of €5 million and a payment of €1.9 million, said to have been paid by Mr Elia to capitalise NF Bank. Those claims are put forward in the witness statements of Mr Elia, Mrs Elia and Mr Zolotas.

There is no doubt from looking at those witness statements that both Mr Zolotas and Mr Elia say that there was a loan of $5 million. Mr Elia says on 2 October: “Michael Zolotas lent me the sum of €5 million.” (Quote unchecked) An appropriate entry in the director’s account does appear in the Sage account and he produces that. He refers to other documents that he says are consistent with, but do not evidence the existence of the loan.

Mr Zolotas says he is a third generation Greek shipping family member. He has known Mr Elia for a number of years. He refers to conversations in 2008. He says he had agreed to make the loan to him of $5 million via one of his companies. He also, it seems to me tellingly, said this:

The position recorded by the document is that set out in the reply of the claimant from which I have quoted. It seems to me that the claims made by these two gentlemen fly in the face of the only contemporaneous documents and there are questions about the reliability of the Sage entries which are said to be in support of them. Not only are there no documents to support an elaborate transaction involving three parties, but there are no emails or correspondence providing a trail to indicate that these transactions were being conceived, were in hand, being negotiated and being carried out.

Similar considerations arise in respect of the €1.9 million. The 1.9 million is said by Mrs Elia to be supported by the evidence of Mr Derek Tullett. The evidence from Mr Tullett consists of a witness statement, not sworn in support of the position of Mrs Elia in this action, but sworn by himself in an action against Mr Elia in March 2010. What is relied upon is a paragraph taken, it seems to me, out of context, which says:

That is put forward by the third defendant as evidence of some sort of personally arranged commercial transaction between the parties. But the evidence of Mr Tullett needs to be seen as a whole. He says at the start of his witness statement that he only deals with certain matters which he believes to be relevant. He refers to the fact that he believes that Mr Elia cynically exploited him for funding and for his City connections. He says that there is no truth whatsoever in the novel and extraordinary allegations about what he had agreed with Mr Elia in respect of other matters. Further, it looks as though there were two payments of €1.9 million, not one.

Again, looking at the documents in context, the position seems to me to be clearly as set out in the passage in the reply which I read out. Commercial transactions of the complexity alleged by Mr and Mrs Elia are almost always recorded in writing or at least accompanied by some contemporaneous writing referring to their potential existence. The commercial rationale for what is suggested by Mr Elia to be Mr Tullett’s involvement is improbable.

So, for all those reasons it seems to me that there is no real prospect of the existence of these loans being established. Moreover, even if there were, for the reasons of law identified by Ms Addy, it would not matter. Even if there were a debt theoretically available for the set off, as a matter of law, no such set off could arise.

That leads to proposition 5, which is that even if any monies were accepted or found to be owing to Mr Elia from the claimant, no previous or subsequent liabilities owed to Mr Elia could be set off against the claimant’s proprietary claim in respect of the profit. This is a proposition, which I summarised when dealing with the fourth proposition. For the reasons that I have just given when discussing the loans, it seems to me clearly well-founded.

There is then proposition 6. Ms Addy contends that No registered disposition for valuable consideration has been made in respect of the Property in Mrs Elia’s favour. Accordingly, no claim by her to any interest in the Property can gain priority over the Claimant’s pre-existing beneficial interest.

Section 27 of the Land Registration Act 2002 provides that if a disposition of a registered estate or registered charge is required to be completed by registration, it does not operate in law until the relevant registration requirements are met. Dispositions are defined in the section. They include those in this case, namely a transfer and the grant of a legal charge. The document recording dealings between Mr Elia and the third defendant is described as an assignment made on 30 July 2010. There is a recital that the vendor has agreed to sell and the purchase has agreed to purchase his interest in the property for the sum of £25,000. There is an assignment of: “All his interest and rights in and to the property.”

The first point made by the claimant is that the assignment can only transfer Mr Elia’s interest and rights to the property. But Mr Elia has no interests or rights into the property by reason of the initial five propositions, which they have put forward. Aside from that, Ms Addy argues that absent any registered or disposition of the property made for valuable consideration and completed by registration, the priority of the claimant’s beneficial interest in the property is not effective. The alleged assignment and the alleged charge were dispositions of a type which were required to be registered under section 27(2). Since they were not registered, they do not operate at law.

The third defendant, through Mr Crystal, disputes that. The position of the defendant is that the Act is applicable to the transfer of legal title and the transfer by the first defendant to the third defendant did not require to be registered. It says that this is a short point of construction. It is argued, in support of the third defendant, that when the transactions were effected through reputable solicitors, registration was no doubt considered and rejected on the basis that it was legally unnecessary to take that step.

It seems to me that the claim of the claimant in this respect is also unanswerable. The transaction is either a legal or other interest required to be registered which has not been registered or it is an equitable interest of some kind, which does not require registration, but which then cannot take priority over the claimant’s pre-existing claim. I conclude, therefore, that the sixth requirement is met.

Overall, it seems to me that Mrs Elia’s defence to this claim has no prospect of success. I have considered what may happen between now and the trial. It seems to me very unlikely that any material is going to emerge between now and then if the case goes forward. The matter has been looked at in considerable length over a long period of time. If there were documents to assist the case, for example, documents evidencing the loans Mr Elia claims to have made, Mr Elia or Mrs Elia would have them. There have been claims put forward that Mr Elia and Mrs Elia have been denied access to the records of the company. For the reasons set out in Mr Jarvis’ witness statement, those claims are not correct. Mr Elia has been given ample opportunity to look at the books and records of the company. The undocumented claims have the appearance of having been put forward very late and under the pressure of litigation.

For all these reasons, it seems to me clear beyond doubt that these defences would fail if they went to trial. They have no real prospect of success. The application succeeds.