Bank of Leumi (UK) Plc v Akrill

By an order of the Court of Appeal made on 17 July 2014, the defendant was granted conditional leave to defend these proceedings. By paragraph 3 of that order, the Court of Appeal provided that "in the absence of agreement between the parties as to the conditions, the matter should be remitted to a judge of the High Court of Justice Chancery Division for determination of the appropriate conditions to impose". The parties have failed to reach agreement and accordingly, after the exchange of a considerable volume of evidence in accordance with the directions given by the Court of Appeal, the matter comes before me to determine the appropriate conditions.

The claimant asks me to impose a condition that the whole of the claimed debt be brought into court, something in the order of £3.7 million. The defendant resists any condition which requires him to bring money into court, but says that if I reject that suggestion, any sum which I order should be modest in amount.

The claimant sues on two guarantees given by the defendant to secure the liabilities to the claimant of two companies, Manor Asset Limited ("Asset") and Manor Property Limited ("Property"). The defendant is the sole shareholder of those two companies. The lending which constitutes the principal liability in this case relates to the intended development of a site in Salford ("the development site"). The principal debt now exceeds £4 million. The guarantees are limited all monies guarantees, limited to the sum of £3.7 million so far as Asset is concerned, and £400,000 so far as Property is concerned.

Demands were made in respect of the principal lending and then under the guarantees in January 2013. By its particulars of claim issued on 2 April 2013, the claimant sought from the defendant alone, the companies not being parties to the proceedings, the sum of £3.77 million. The claimant then sought summary judgment on its claim. The defendant defended that application on the grounds that (1) he was induced to enter into the guarantees as a result of fraudulent misrepresentations to the effect that the claimant would exhaust its remedies against the principal debtors before looking to him; and (2) the bulk of the principal lending was not due for repayment because it had been converted from a loan repayable on demand to a loan repayable on reasonable notice and that no such reasonable notice had been given.

The claimant contended that the evidence put forward by the defendants in opposition to the application for summary judgment was not credible and that the arguments advanced by him disclosed no real prospect of successfully defending the claim.

The claimants persuaded the court at first instance to give it judgment for the entire sum. On appeal by the defendant, the Court of Appeal held that the two arguments advanced by him were, though improbable, not wholly implausible or fanciful.

Kitchin LJ gave the leading judgment in the Court of Appeal and, in his conclusion at paragraph 56, said as follows:

In paragraph 57 his Lordship went on to say:

There has been a considerable body of evidence in this case which I have been taken to, exploring, among other things, the matters referred to by the learned Lord Justice in that final paragraph of his judgment. I have borne that evidence in mind in reaching the conclusions which I will come to in due course.

Much of the evidence is contentious, in that there are repeated challenges to statements of facts contained in the other parties' evidence. On the application before me, it is not appropriate, and indeed in my judgment not open to me, to begin to determine these contested factual issues and I do not do so. I will not in this short judgment on the limited issues set out the detail of the evidence to which my attention has been drawn. I have also been referred to a number of authorities which I will come to in due course.

The parties' respective stances in the course of arguments are, in essence, as follows. The claimant submits, first, that the defendant's Defence is improbable and advances four reasons in support of that submission, each of them developed in the course of argument. Secondly, that the defendant in breach of his duty of full and frank disclosure on this application has failed to provide good and reliable evidence of his means entitling me therefore to draw the inference that he has assets which would be available to meet the condition which they suggest should be imposed. Thirdly, that the defendant's assertion that the claimant is in any event fully secured for the principal debt by a first charge which it holds over the development site is (a) overlooks the purpose of imposing a condition on permission being given to defend a claim, alternatively is of relatively limited importance in considering what conditions to impose; and (b) is incorrect as a matter of fact because of the deficiencies in the valuation report relied on by the defendant, which deficiencies were explained to me in detail in the course of argument.

The defendant submits that the claimant is fully secured, and secondly that, although the defendant has many assets, none of them can be realised at full value quickly or easily and that, if the defendant were forced to liquidate his assets, which he describes as "nest eggs", he would be substantially prejudiced and would suffer long-term harm and that any condition therefore should not require him to realise any of his assets. His evidence is that, while he holds assets with a value of £20 million (or thereabouts) he has no income and currently lives and funds his defence of this claim on what he has given by others or on smaller assets which he realised some time ago.

I am afraid that I expressed my incredulity in the course of submissions at Mr Pipe's suggestion that anyone with £20 million worth of assets on their own case could be described as being “on their uppers”, even if they had no income or cash in the bank. I am afraid it is a view that I still hold after having re-read the evidence and considered all the submissions which have been made.

In determining this application it seems to me that it is important to consider before doing so what principles govern the imposition of conditions on the grant of permission to defend a claim and what their intended purpose is. One can derive the following principles from the cases and the rules to which my attention has been drawn.

First, having regard to paragraph 5.2 of the practice direction to CPR Part 24 the orders which a court may make on an application under Part 24 are now circumscribed and include (per paragraph 5.1): (1) judgment on the claim; (2) the striking out or dismissal of the claim; (3) dismissal of the application; and (4) a conditional order. I note that the practice direction then continues as follows:

It seems to me that the note is intended to indicate that the only formal orders which the court should make are those which appear in paragraph 5.1 set out above.

Thirdly, paragraph 4 of the practice direction provides, under the heading "The Court's approach" that:

Fourth, "a conditional order" is defined by paragraph 5.2 of the practice direction as:

Fifth, security will be ordered where the court considers that a defence is "shadowy" or "dubious in its bona fides ", see Lord Diplock in Yorke Motors v Edwards [1982] 1 WLR 444 at page 450. The principal reason for ordering security remains, in my judgment, to test the bona fides of the party against whom it is ordered. In the words of Mr Pipe it is as an earnest. In the more graphic expression of Mr Casey, it requires a litigant “to put his money where his mouth is”.

Sixth, a second purpose behind the condition is "to protect the claimant to some extent": see Brandon LJ (as he then was) in the Yorke Motors case in the Court of Appeal [1981] WL 186796.

Seventh, one of the factors which in the 1980s led to an increase in the making of conditional orders was "the greater premium now accruing to the debtor who manages to achieve delay", again see Lord Diplock at page 450 in Yorke Motors . I think I am entitled to take notice of what appears to be a trend that, since the coming into force of the Civil Procedure Rules, which its emphasis on active case management by the judiciary, there has been a decrease in the number of conditional orders made following a summary judgment application. It seems to me that is because of the fact that the timetable is now controlled by the judiciary to a much greater extent than it was previously. The importance, therefore, of imposing a condition so as to discourage defendants from delaying the progress of the litigation, has diminished; nevertheless, it remains a relevant and not unimportant consideration.

Eighth, in setting the amount of any sum to be brought into court, the means of the payer have to be taken into account. As Lord Diplock said at page 449 of Yorke Motors :

This balancing exercise has regard to the rights of the defendant under Article 6 of the European Convention on Human Rights: see Park J in Anglo-Eastern Trust Limited & Sir David Alliance [2002] CP Reps 36.

Ninth, by analogy with applications for security for costs, a party who resists the imposition of a condition on the grounds of impecuniosity, must demonstrate that it does not have the resources required to meet the condition and cannot raise them from others, whether they be business associates, friends or relatives of the party, described by Brandon LJ in Yorke Motors in the Court of Appeal as persons "all of whom can help in his hour of need".

In Dubai Islamic Bank PJSC v PSI Energy Holding Co PSC & Ors [2011] EWCA Civ 761, Tomlinson LJ expressed the matter in this way at paragraphs 30 and 31 when considering the analogous situation of applications for security for costs:

In applying what his Lordship said there, it seems to me that one must also have regard to the difficulty expressed in the Anglo-Eastern case of proving a negative, ie that the respondent does not have the assets which the applicant alleges: see paragraph 55 of Park J's judgment.

The starting point in applying those principles to the facts, is to take account of the ruling of the Court of Appeal in the instant case and the finding by their Lordships that the two lines of defence advanced by the defendant are improbable. Although I have listened carefully to the submissions of the claimant concerning the defendant's credibility, I cannot determine on paper where the truth lies in respect of the parties' competing contentions in respect of those lines of defence. Each of the points made by Mr Casey has some force, but the true force will only become apparent when advanced in the course of, among other things, cross-examination of the defendant at trial. I approach the consideration of the conditions to be imposed on the basis that the defendant's case is shady (to use the old expression) or improbable, as appears in the current rules and in the judgment of Kitchin LJ and that the defendant’s evidence as to his means is subject to considerable challenge.

The sum which ought to be paid into court must be one which (a) tests the defendant's bona fides , (b) discourages him from delaying the proceedings and (c) provides some security to the claimant, but (d) is one which I consider on the balance of probabilities is one which he is able to pay, even if that means looking to third parties to raise the sum or part of it.

As Mr Casey rightly submits, there are numerous instances in the defendant's evidence where he fails to give the information which ought to be provided having regard to the principles enunciated by Tomlinson LJ in the Dubai case. For example, he has failed in his evidence to give proper particulars of the support said to have been provided by his wife, his in-laws, his family trust nor of how he has been funding this litigation. I do not accept that it was incumbent on the claimant, as Mr Pipe submitted, in reliance on a letter dated 7 November 2014, to identify the respects in which the defendant's case was lacking. In my judgment, the burden was at all material times on the defendant to provide proper evidence to show how he supports himself. That is not proving a negative, but in a very sense, a positive. His case is that he has been supported by others, and he identifies his supporters, but he gives no evidence which the court can evaluate. The court cannot identify how much he has been provided with, where it has come from, nor what the resources of his supporters are. The matters identified by Brandon LJ in Yorke Motors and Tomlinson LJ in Dubai , simply cannot be analysed because the material is not there to enable me to do so. I am left, therefore, having to draw inferences in that regard from the defendant’s failure to give such evidence.

I am also concerned, as I mentioned in the course of argument, about the number of instances in which the defendant's evidence has, after challenge from the claimant, been corrected, referring to the earlier errors as inadvertent. That gives me concerns about the reliability of the evidence which he has given about his financial affairs. Nor has the defendant, in my judgment, adequately answered the claimant's request for further and better information concerning his financial affairs. I need not in this judgment, it seems to me, cite the details of those instances; the background facts are not in dispute.

It is plain that the court has not been presented with a complete picture so far as the defendant's financial affairs are concerned and I am entitled, as I have already said, to draw certain inferences from that. The inference which I draw is that the defendant has, or has access to, or is able to raise, ready or liquid funds which he has been unwilling to provide the detail of.

Notwithstanding the attempts by the claimant to show that it was not a wholly reliable statement of his capital assets, there is one piece of evidence which stands out, namely the defendant's assertion in his witness statement dated 21 November 2013 in support of his application before the Court of Appeal for a stay of execution, in which he said that he owned assets to the total net value of not less than £18,081,434, the details of which are contained in a statement of assets and liabilities dated 18 November 2013, of which he says at paragraph 7 of his witness statement as follows:

Those are ample assets which, in my judgment, provide him with a source from which to raise the sum which I will set in due course.

In setting that sum, I have considered whether and, if so, to what extent the defendant should provide security for the debt or, as Brandon LJ described it "protection for the plaintiff". The defendant says that the claimant is fully secured by virtue of the first charge over the development site and produced a valuation by Lambert Smith Hampton, dated 7 November 2014 which valued the development site as at that date in the sum of £8 million. The claimant says that the valuation is based on a number of false premises, chief among which are what are said to be pre-letting and other agreements which have not been disclosed.

I am also concerned about the apparent absence from the evidence before me of the instructions upon which the valuation was carried out. The first appendix to the valuation describes the contents as “LSH Terms of Engagement, email of instruction and letter of acknowledgment”. Prior to the hearing, the first appendix in the exhibit before me was empty. During the course of the hearing Mr Pipe was able to produce a letter of 27 October 2014 containing the terms of engagement. What is still missing is an email of instruction and letter of acknowledgment. It is apparent from the letter of 27 October that instructions were provided on an earlier date. Those I have not seen. Therefore, the precise premises on which the valuation has been carried out are currently unknown.

The defendant says, however, that the pre-lettings and other agreements referred to in the body of Lambert Smith Hampton's report as forming the basis of the assumptions on which they have carried out their valuation, as is apparent from the middle section of the first paragraph of the report under the heading "reporting restriction", can be verified by a further witness statemant. The claimant, in addition to challenging the Lambert Smith Hampton valuation report on its face, relies on its own, much lower, valuation by way of comparison. It is submitted that the claimant’s valuers adopt a much more structured and realistic approach to the question of the current value of the development site and set out in a way that is very easy to follow, the steps taken by the valuer to reach conclusions expressed in the report.

In the light of that conflict, I am not able on paper to determine the true value of the property. I bear, however, both valuations in mind. I am conscious of the deficiencies alleged by the claimant in the defendant's valuation and in the light of the defendant's other evidence, I do have concerns about the premises on which the valuation is based. Nevertheless, it is plain to me that the claimant has some valuable security, if not full security, over the development site for the principal debt and the effect of that ought to be to reduce by a margin the amount which I would otherwise have ordered to be paid into court.

For the reasons that I have already given and because I intend to give directions to trial for the future conduct of this case, the discouragement of delay engendered by the size of the sum ordered to be paid into court, also plays a relatively small part in my mind in determining what that sum should be. Finally, in order to achieve the purpose of testing the bona fides of the defendant, the sum needs, notwithstanding what I have already said, to be a substantial one and one which the defendant can raise.

I have come to the conclusion in all the circumstances that the sum which would satisfy both of those principles is the one which I suggested to counsel in argument of £1 million. It seems to me that that ought to be paid into court within three months. It is a relatively small part of the defendant's overall assets as declared by him, but I also draw the inference from the material before me that he could, without undue difficulty, raise it either from his own assets given sufficient time, or from the sources which have been providing him with what must have been and must continue to be a relatively substantial income, notwithstanding what he asserts in his evidence.

The second condition is that the defendant, in a timescale which I will discuss with counsel, files with the court and sends to the claimant, a witness statement verifying the matters that he offered to verify in respect of the valuation upon which he relies.