Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE DAVID STEEL
Between :
Battlebridge Group Ltd | Claimant |
- and - | |
(1) Amala Equity Ltd (2) Joseph Kelly | Defendants |
Andrew J D Green (instructed by Cadwalader Wickersham & Taft ) for the Claimant
Alexander Cranbrook (instructed by DMH Stallard) for the Defendant
Hearing date: 8 November 2006
Judgment
Mr Justice David Steel :
The Claimant (“Battlebridge”) is a private equity investment company incorporated in England. The claim arises out of a Limited Recourse Loan Agreement dated 28 January 2004 (“the Agreement”) between Battlebridge and Amala Equity Ltd (“Amala”). In the Agreement, Amala was described as a company “incorporated under the laws of Gibraltar and represented by Joseph Kelly”. Joseph Kelly (“Mr Kelly”) is the 2nd Defendant.
In the particulars of claim, Amala, joined as the 1st Defendant, is described as a party to the Agreement and identified as a company incorporated under the laws for Ireland. It was said “to carry on business as an investment company”.
It became clear during the trial and in particular during the course of the oral evidence of Mr Kelly: -
that there were two companies under the name of Amala: one incorporated in Ireland and the other in Gibraltar;
neither of them has ever traded;
they are both the creatures of Mr Kelly: he is the sole shareholder and the sole executive director: the companies are both controlled by him;
both companies have bank accounts but no assets;
Mr Kelly appreciated the fact that Battlebridge’s pleaded case as to the identity of the parties to the contract was inaccurate, despite which he allowed the filing of a defence on his behalf admitting the identity of the contracting party;
the Gibraltar company was struck off the register on the 28 June 2006.
This state of affairs was the subject of supplementary submissions after completion of the trial. Counsel for the Claimant submitted that it was appropriate both to proceed on the basis that the contracting party was the Irish company and to amend the Particulars of Claim to advance a personal claim against Mr Kelly on the basis that the Irish company was a façade for the business activities of Mr Kelly so that the corporate veil of the Irish company should be pierced.
There was no response to this submission until the eve of the judgment being handed down. At this late stage the Defendants submitted that there was no evidence of the role played by other directors in the operations of the company. I reject this submission. I have no doubt whatsoever that Mr Kelly was in total control of the company being sole shareholder and sole executive director. Accordingly I allow the amendment and proceed on the basis suggested. This may be of less significance that might appear at first blush. Even at the hearing I understood it was accepted on Mr Kelly’s behalf that any liability of Amala was his also.
By the agreement, Amala agreed to lend a total sum of £3.69 million to Battlebridge secured against 5,493,708 shares in an AIM listed company called 3DM Worldwide Plc (“TDM”). The amount of the loan was 40% the value of the shares as at the time of receipt of those shares by Amala.
The agreement provided that the shares should be placed and remain in a designated account described as “Banca Aperta A/c No.100934886300 reference Joseph Kelly A/c No.22/52378-Amala Equity”. Amala were under an obligation not to deal with the shares (save to the extent of establishing its credit line for financing the loan).
Battlebridge’s obligation to pay the loan (the term being 5 years) was to be evidenced by a promissory note in a prescribed form, delivery of which was a condition precedent to the advance.
The loan was on a non-recourse basis namely so in the event of default by Battlebridge, Amala’s only recourse was to be by way of liquidation of the collateral stock.
The agreement was executed on 28 January 2004 and the share certificates were duly forwarded to Amala. Amala became the registered holders of the stock on 24 February 2004. The certificates were placed in the hands of Phillips Securities (UK) Ltd (“Phillips”) in a nominee account. Thereafter it appears that some 5 million shares were transferred out with a view to placement in the designated account with the balance of 493,708 shares remaining at Phillips.
There was some dispute as to whether the 5 million shares went to or remained in the designated account. Two features of the documentation were the subject of argument: -
The history printout showed the shares that had been lodged with the Bank of New York in London.
The bank statements produced by the Defendants showed the shares to be deposited with Credito Artigiana.
It was the Defendant’s case that the apparent anomalies were easily explained. Both Banco Aparta and Credito Artigiana were said to be part of the Credito Valtellinese Group and Bank of New York was the group’s custodian.
Another important feature of the original deposit of the shares was the question of whether, and if so when, Mr Kelly had disposed of some 60,000 shares out of the balance of 493,708. What emerged by the time of the trial, and was in due course admitted by Mr Kelly in his oral evidence, was that 60,000 shares had been sold as early as 1 March 2004 for a total of £102,000.
I revert to both these topics in due course.
By mid-March, Mr Kelly indicated that the loan monies would be available shortly but despite frequent reminders from Mr Christopher Livingstone-Raper, a director of Battlebridge who had executed the loan agreement on Battlebridge’s behalf, no funds had been furnished by Amala by the end of April.
On 28 April a meeting took place between Mr Livingstone-Raper and Mr Kelly, the outcome of which formed the centrepiece of the dispute in this action.
It was Battlebridge’s case that it was agreed at that meeting as follows: -
Amala would advance £2million out of the loan amount upon execution of the promissory note, the balance to be advanced within two months so as to permit Mr Kelly to carry out ‘checks’ on TDM:
the collateral would be reduced to 5million shares, the balance of 493,708 shares to be returned forthwith.
It was the Defendant’s case that it was agreed:
the sum of £2million would be advanced immediately;
the balance was conditional on checks to be carried out by Mr Kelly proving satisfactory;
(at a subsequent meeting) that all the shares not held by Phillips were to be returned, being only 433,708 in total.
There ensued a considerable delay before any of the extra shares were returned. It must be noted at passing that at some stage during June the TDM shares were suspended for about 2 weeks. On 9 June Mr Livingstone-Raper sent an e-mail which put Battlebridge’s stance very clearly: -
“… what is the problem Joseph, please advise when a) the 493708 shares are to be delivered to Battlebridge account… b) the remainder of the funds under the agreement are to be delivered.”
Mr Livingstone-Raper’s further chasers for the return of the shares and the provision of the loan monies were contained in a series of e-mails, telephone conversations and faxes. Running short of patience on 8th July Mr Livingstone-Raper wrote as follows: -
“You have failed to respond to all of my e-mails, phone calls and faxes, so I am formally writing to you with a number of requests.
Upon the signing of the Collateral Limited Recourse Loan Agreement, dated 28th January 2004 I expected that a number of things would happen. Sadly Amala Equities Limited have still not fully complied with the terms of the agreement hence I write to you to request that you remedy them.
The following actions still need to be done: -
1. To forward the full value of the loan as per Clause 2.1.
2. Amala to return 493,708 shares in 3DM as you only pledged 5,000,000 and not the total of 5,493,708 to pledge the full 5,493.708 shares in 3DM as set out in appendix A of the agreement.
3. An explanation as to why you kept in an account at Phllips Securities (UK) Ltd the 493,708 shares.
4. An explanation as to why you have traded at least 60,000 of these shares for your own personal gain.
5. Why the 5 million shares have been moved from the designated account to an account at the Bank of New York nominees, which is contrary to the terms of the agreement. ... ”
....
Battlebridge Group Ltd expects you to remedy these breaches otherwise it shall consider terminating the agreement and seek damages for losses suffered.”
But it was not until September 2004 that some 433,708 TDM shares were re-registered with Amala and it was not until 8 November that any written response from Mr Kelly to Mr Livingstone-Raper’s complaints was received: -
“I have been travelling in the past week and therefore unable to reply before now. I am willing to have an amicable discussion to resolves issues; however, while you are using language that incorporates legal threats I cannot envisage an amicable dialogue taking place…”
Despite this proposition, on the 24 November there was a further meeting between Mr Kelly and Mr Livingstone-Raper. Mr Livingstone-Raper’s contemporary note of that meeting, as despatched to his solicitors, reads in part as follows: -
“…
2. He was happy to talk about the position where we were as regards to the loan. He agreed that the initial £2million advance of the loan should have been followed with the remainder. His reasoning was that he was unsure whether 3DM Worldwide was a pump and dump company and was protecting his client i.e. the one he borrowed the funds from to do the non-recourse loan with us.
3. I said I understood his position but it didn’t reflect upon the agreement we had and that he had breached the terms of it.
4. I mentioned that we were willing to pursue this through the Civil Courts and if necessary make a formal complaint to the appropriate authority if advised by our lawyers….
6. When asked he said the remainder of the money was in an Esco account and had not been touched.
7. When asked he denied that he had not traded a single share out of the Phillip’s securities account that held the remainder of the Battlebridge stock...
8. His excuse for not contacting me was that he had been contacted by the FSA who were enquiring into this loan agreement and they had told him not to contact us.
9. He said another reason for not forwarding the second part of the loan amount was because we had suspended our stock of 2 weeks and not informed him…”
Mr Livingstone-Raper repeated this account of the meeting in a letter to Mr Kelly dated 3 December, adding expressions of disbelief as to the alleged FSA enquiry.
In response Mr Kelly, in a letter dated 31 January 2005, made the principal point that in his judgment the original stock price was inflated. The letter went on to make an offer for a further loan of £1million but on different terms to that contained in the loan agreement.
The Witnesses
As I have indicated, the case largely turns on the outcome of the meeting between Mr Kelly and Mr Livingstone-Raper in April 2004. The trial was thus taking place nearly 2½ years later. The witness’s actual recollection of events must predictably have dimmed. In these circumstances, I respectfully endorse the observations of Lord Justice Robert Geoff in TheOcean Frost [1958] 1 Lloyd’s Reps 1. at p.57: -
“It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witness’s motives and to the overall probabilities, can be a very great assistance to a judge in ascertaining the truth.”
That said, I should express my impressions of the two witnesses who attended that meeting: -
Mr Livingstone-Raper struck me as a straight-forward and responsive witness in whose evidence I could place confidence particularly where consistent with the documents.
Mr Kelly, on the other hand, struck me as a particularly unsatisfactory and evasive witness, all the more and unconvincing as his evidence was seldom supported by the contemporary material.
£1.69 million
The major dispute centred on the question whether the balance of the loan was, as Mr Kelly contends, conditional on the satisfactory outcome of his checks on TDM. Absent such a condition, it is common ground that, after allowing for the engagement fee of £156,900 as prescribed by Clause 3.1 of the Agreement, Battelbridge is entitled to judgment for the balance.
I have no difficulty in rejecting the existence of any such condition for the payment of the balance of the loan:
Despite numerous demands by Mr Livingtone-Raper in the correspondence for payment of the balance of the loan, at no stage did Mr Kelly ever respond to the effect that the balance was not due because the checks were either incomplete or unsatisfactory. Indeed in his final letter, responding to Mr Livingstone-Raper’s detailed reasoning for payment of the balance, there is no suggestion by Mr Kelly that the money was not due, simply that the original agreement was based on an excessive share price.
Although it is pleaded that payment of the balance was conditional on these checks, there is not a word of support for that proposition in Mr Kelly’s witness statement.
The whole concept of a variation to limit the drawdown makes little commercial sense: although the loan sum was to be reduced by 40%, the share capital was to be reduced by only 10% or so and, even more strikingly, the sum secured by the promissory note was to remain at £3.69million.
For the sake of completeness, I accept Mr Livingston-Raper’s evidence that he was only minded to forebear pressing for the full loan in April because Mr Kelly “held all the cards”.
It follows that Battlebridge is entitled to payment of the balance of the loan subject to the engagement fee.
60,000 shares
It is common ground now that some 493,708 shares should have been returned. It also appears to be accepted that there was no basis upon which Mr Kelly could have legitimately sold 60,000 of those shares. They were sold before any advance had been made, let alone before any interest had accrued.
Indeed, the striking lack of frankness in regard to the sale of these shares reflects seriously on the honesty of Mr Kelly:
The pleaded case was both that the 60,000 shares formed part of the collateral and “that the 60,000 shares were retained” because the Claimants had failed to pay any interest on the loan.
In the further information furnished under CPR Part 18, the Defendants asserted that the shares were used “as security for the hedge position”.
In his statement Mr Kelly stated “I decided to hold back 60,000 shares pending payment of the interest which Mr Livingstone-Raper had promised at our meeting in May”.
The reality was that the shares had been sold in early March. The kindest thing that could be said is that this was in anticipation of the engagement service fee. Be that as it may it is clear that Battlebridge is entitled to the value of the shares thus converted in the sum of £102,000.
Collateral shares
I return to the question whether the shares are in the designated account. The documentation is unquestionably thin and confusing and this in large part is attributable to the failure of the Defendants to give proper disclosure.
I am not persuaded that the shares have not been put in the designated account but, given the history of this matter, I nonetheless am minded to grant the injunction sought by Battlebridge as contained in paragraph 15 of the Particulars of Claim to the effect that the Defendant should continue to hold the shares in the designated account.
Counterclaim
I can deal with the counterclaim even more briefly. This is a non-recourse loan. The Defendants are not entitled to a monetary judgment but only to look to the collateral shares as a source of any legitimate remedy. I say no more about it.