GMAC Commercial Finance Ltd v Mint Apparel Ltd

This is an application by the Claimant for summary judgment on two unpaid bills of exchange in the total sum of US$759,200.49 plus interest. The Claimant is the holder for value of those bills which the Defendant had accepted.

The Claimant became the holder of the bills pursuant to the terms of a credit facility which it had provided to China Export Finance Limited (“CEF”). CEF had in turn provided trade finance to Chinese exporters.

Although there is incomplete documentary evidence as to the terms on which CEF provided trade finance there is broad agreement, at any rate for the purposes of this application, that CEF would pay the exporter 80% of its invoice and draw a bill of exchange on behalf of the exporter for 100% of the invoice value. The Defendant, the importer, then accepted the bill. On maturity of that bill the importer would pay the sum due under it to CEF who would remit 20% (less a sum in respect of its fee) to the exporter.

The terms of the credit facility provided by the Claimant to CEF were set out in an Invoice Discounting Agreement (an “IDA”). This is a complex and detailed agreement. In his Skeleton Argument Mr. Turner, counsel for the Claimant, summarised its effect in this way. CEF would sell the debt evidenced by the bill of exchange to the Claimant and provide it with the bill of exchange accepted by the Defendant, and the Claimant “would make 85% of the value of the debt available to CEF”. When the Defendant paid CEF the underlying debt (or part of it), CEF was required to remit that money either to a trust account or to the Claimant’s own account. However, a more detailed analysis of the IDA was presented in oral argument. Mr. Turner described the IDA as a revolving credit facility pursuant to which the amount which could be remitted to CEF was not defined by reference to any particular bill of exchange but by reference to the total of the credit available subject to a limit, namely, $20m. or 85% of the value of all debts purchased by the Claimant, whichever was the lesser.

The two bills of exchange which are the subject of this claim, one for $671,826.21 and the other for $87,374.28, were accepted by the Defendant. They were dated 27 November 2009 and 30 December 2009. Payment was to be made to the order of CEF on 23 February 2010 and 23 March 2010. There was no real dispute that those two debts were “purchased” by the Claimant pursuant to the IDA. Counsel for the Claimant submitted in his skeleton argument that the Claimant extended credit to CEF of “85% of the face value of the bills.” The bills were not paid on their due dates and CEF went into administration. Pursuant to the terms of the IDA the Claimant, using a power of attorney granted by the IDA, indorsed the bills on behalf of CEF to the Claimant. Counsel submitted that the Claimant as holder for value of the bills was entitled to judgment on them.

Proceedings were commenced on 19 May 2010. A Defence and Counterclaim were served on 23 July 2010. No liability was admitted. It was said that, in any event, the Claimant had to confirm that an amount equal to 20% of the bills (less CEF’s fee) would be paid to the exporter and credit had to be given for the amount equal to 20% of three earlier bills (less CEF’s fee) which had not been paid over to the exporter by CEF.

The Claimant issued its application for summary judgment on 12 August 2010. It was supported by a witness statement of Mr. Linos Choo, a solicitor acting for the Claimant, who had received instructions from Jenny New, the Claimants’ Head of Legal and Senior Vice-President for European Operations. He said this:

“5.

Although it has not seen the contracts between CEF and its own customers, GMAC CF understands that CEF would pay 80% of the seller’s invoice, and draw a bill of exchange on behalf of the exporter on the buyer for 100% of the invoice value. This allowed the buyer time to pay, while maintaining cash flow for the seller. Once the buyer had paid 100% of the invoice (plus a fee), CEF would pass the balance of 20% (less a further fee) to the seller.

6.

From early May 2008, CEF financed its service in part by means of a facility with GMAC CF. Once CEF had received accepted bills of exchange from the buyer, it would sell the debt to GMAC CF under the terms of the facility agreement between GMAC CF and CEF, and – in broad terms- GMAC CF would make available 85% of the value of the debt to CEF.”

On 23 September 2010 a witness statement in opposition to the application was made by Geoffrey Haslehurst, a director of the Defendant. With regard to Mr. Choo’s evidence he questioned whether the Claimant could claim 100% of the bills of exchange when the Claimant had only provided finance equal to 85% of the bills of exchange. However, he accepted, subject to a condition which has now been satisfied, that judgment could be given on the claim for the sum of $349,920.49 but not in respect of the balance of the claim. The balance of the claim was made up as follows:

Further witness statements were made by Mr. Choo on 23 September 2010 and on 28 September. He exhibited the IDA, which enabled counsel to make detailed submissions as to the effect of the IDA, and stated that the current indebtedness of CEF to the Claimant under the IDA was $1,837,666.45 and that the total sum due from bills of exchange was in excess of $1.9m., so that if they were paid in full there might be a small surplus owing to CEF.

On the hearing of the application for summary judgment Mr. Harrison, counsel for the Defendant, identified three defences which he submitted justified dismissal of the application. They may be summarised as follows:

It is necessary to consider whether any of these suggested defences has a real prospect of success.

This is based upon the premise that the Claimant has only advanced 85% of the bills of exchange. It is understandable that this point has been raised given the statement by Mr. Choo in his witness statement that “once CEF had received accepted bills of exchange from the buyer, it would sell the debt to GMAC CF under the terms of the facility agreement between GMAC CF and CEF, and – in broad terms - GMAC CF would make available 85% of the value of the debt to CEF.” However, once the point was raised it was necessary to examine in more detail the terms of the IDA. They had not been considered in detail in the Skeleton Arguments. Both counsel directed their submissions to clause 7 of the IDA entitled “Accounting and Payment to the Client”. It provided, so far as material, as follows:

“7.1

Upon receipt by GMAC CF of a Notification relating to any Debt …….GMAC CF shall credit its Notified Value to the Client Account……….

7.2

Subject to the provisions of clauses 7.3, 7.4 and 7.5 GMAC CF shall remit to the Client or to its order on account of its obligation to pay the Purchase Price of Debts any part of the balance for the time being standing to the credit of the Client in the Client Account.

7.3

The Client shall not be entitled at any time to any payment in respect of the Purchase Price of any Debt:

…….

7.3.3

if and to the extent that such payment would result in:

(a)

the aggregate of all Prepayments in respect of all Outstanding Debts in accordance with this agreement exceeding a sum produced by deducting the Reserve and the Ineligible Debts (without double counting) from the Gross Purchase Price of all Outstanding Debts and multiplying the result by the Prepayment Percentage [85%];

…..

(c)

at any time the aggregate of Prepayment in respect of all Outstanding Debts exceeding the Prepayment Limit [$20m.] or such other amount as GMAC CF and the Client shall from time to time agree….”

The Client Account is maintained by the Claimant “in the name of the Client for the purposes of recording all transactions between GMAC CF and the Client pursuant to this Agreement.”

Clause 7.5 provided that payments were to be made by the Claimant to CEF into a bank account of CEF. By clause 7.6 the Claimant was to provide statements showing “movements” in the Client Account.

Clause 14 obliged CEF to “hold and keep separate from [its] other moneys all cheques instruments and moneys that may be received by it in payment of or on account of Debts purchased by [the Claimant] and immediately pay all such cheques instruments and moneys properly indorsed where required” either directly to the Claimant or into a Trust Account (which was to be in the name of CEF but held by CEF as trustee for the Claimant).

The IDA therefore provides that once a debt has been notified by CEF the Claimant is obliged to credit its value to the Client Account. The sum credited to that account appears to be 100% of the value of the debt. The amount actually remitted to CEF may be any part of the balance standing to the credit of CEF in the Client Account. Thus the amount paid is not limited to the value of any particular bill of exchange or to any particular percentage of it. Clause 7.3.3(a) provides a limit on the amount which may be paid which is calculated by reference to the Prepayment Percentage of 85%. This is no doubt the origin of Mr. Choo’s evidence that “in broad terms - GMAC CF - would make available 85% of the value of the debt to CEF.” However, it is apparent from the terms of clause 7.3.3(a) that the limit is not calculated by reference to an individual bill of exchange but by reference to the totality of all outstanding debts.

It is no doubt true that the purchased debts are regarded as the Claimant’s security for extending finance to CEF but the business common sense of that arrangement, having regard to the terms of the IDA, is surely that when it is necessary to exercise the rights conferred by that security, namely, to call upon the acceptor of bills of exchange to pay the amount of those bills, 100% of those bills is to be paid. Such amounts will then be credited against CEF’s total debt to the Claimant. Such an approach is consistent with clause 14 which requires all moneys received in payment of a debt to be paid to the Claimant. It does not provide that only 85% of such payment shall be paid to the Claimant.

I am therefore not persuaded that the Defendant has a real prospect of establishing at trial that the Claimant can only recover 85% of the amount of the two bills of exchange which are the subject of this action.

This argument is premised on the basis that the Claimant knew that CEF advanced only 80% of the bill of exchange to the exporter and, when the bill was honoured, that CEF paid the exporter the remaining 20% (less its fee). This is supported by the witness statement of Mr. Choo who referred to the Claimant’s understanding of the arrangement between CEF and its customers (whilst pointing out that the Claimant does not know the detail of that arrangement).

Mr. Harrison submitted that as between CEF and the exporter CEF would hold 20% of the proceeds of the bills of exchange (when paid by the Defendant to CEF) on trust of the exporter. In support of this argument he relied upon the decision in Barclays Bank v Aschaffenburger Zellstoffwerke AG [1967] 1 Lloyd’s Rep. 387. He further submitted that the Claimant’s knowledge of that arrangement gave rise to a constructive trust in favour of the exporter in respect of 20% of the proceeds of the bills of exchange when paid by the Defendant to the Claimant. Mr. Turner submitted (in part at the hearing and in part by way of written submissions provided after the hearing) that there was (or would be) no trust relationship between CEF and the exporter and therefore there was (or would be) no trust relationship between the Claimant and the exporter. In any event, even if there were a trust relationship between the Claimant and the exporter only the beneficiary, namely, the exporter, could enforce it. The Defendant, as a stranger to the alleged trust, has no right to enforce it.

The documentary evidence in support of the relationship between CEF and its customers consisted of the “Receivables Purchase Agreement Form”. The evidence was not complete because, for example, the Form made reference to General Conditions which were not before the court.

There was no reference in the Form to a trust in respect of 20% of the proceeds of the bills of exchange. However, as I understood Mr. Harrison’s argument it was that what is known of the relationship between CEF and its customers gave rise to an implied or constructive trust in respect of that 20%. He said the relationship was analogous to that found in Barclays Bank v Aschaffenburger Zellstoffwerke AG [1967] 1 Lloyd’s Rep.387.

In that case Barclays extended finance to its customer Black Clawson. The Bank appears to have bought bills of exchange which had been drawn by Black Clawson on its customer. A facility letter indicated that as and when the bills were paid 73.161% was to be kept by the Bank and 26.839% was to be credited to the account of Black Clawson. Lord Denning considered that the Bank held the 26.839% as trustee for Black Clawson. I accept Mr. Harrison’s submission that it is arguable that by analogy it can be said that CEF, had it received the proceeds of the bills in the present case, would hold 20% on trust for the exporter.

Mr. Choo’s statement as to the Claimant’s understanding of the arrangement between CEF and the exporter may be regarded as evidence that the Claimant became indorsee of the bills of exchange with knowledge that if the proceeds of the bills had been paid to CEF 20% thereof would be impressed with a trust in favour of the exporter. I am doubtful whether such knowledge is sufficient to make the Claimant a constructive trustee as to 20% of the proceeds of the bills of exchange as and when they are paid to the Claimant. Such a trust seems to have no place in the scheme of the IDA and to be contrary to its business purpose. However, on the assumption that such a trust is realistically arguable I nevertheless accept Mr. Turner’s submission that whilst such a trust would give the exporter a claim against the Claimant if it does not deliver 20% of the proceeds to the exporter it does not give the Defendant any defence to the claim brought against it by the Claimant pursuant to the indorsed bills of exchange. The Defendant must still honour the bills of exchange which it accepted.

I am therefore not persuaded that the Defendant has a real prospect of establishing at trial that the Claimant can only recover 80% of the amount of the two bills of exchange which are the subject of this action.

There appears to be some doubt as to whether liquidated claims which the acceptor of a bill of exchange could have set-off against an immediate party to the bill can be set-off against a claim on the bill by a holder of the bill for value. Thus Chalmers and Guest on Bills of Exchange 17^th ed. at paras.4-009 and 4-027 suggests that he cannot set-off such claims against a holder for value whilst Byles on Bills of Exchange 28^th ed. at para.19-046 suggests that there is no reason why a holder for value should not be subject to the same defences as might be raised against an immediate party. I was not addressed on this issue in any depth and in the circumstances I am unable to say that the defendant has no real prospect of establishing that liquidated claims available against an immediate party may be set off against a holder for value.

There appears to be no dispute that in relation to the three earlier bills CEF did not pay 20% of the proceeds of the bills to the exporter but instead paid 100% of the proceeds to the Claimant. That has given rise to a claim by the exporter against the Defendant.

Mr. Harrison submitted that had CEF sought payment of the bills from the Defendant the latter would have been able to set off against such claim the claims made against it by the exporter for CEF’s failure to pay over the 20% of the earlier three paid bills.

However, neither in his Skeleton Argument nor in his oral submissions did Mr. Harrison identify a cause of action on which the Defendant could base such a claim other than a trust. But reliance on a trust in favour of the exporter would not assist the Defendant for the reasons already given. There was no evidence of any written contract between the Defendant and CEF. Although paragraph 4 of the Defence referred to “transactions between” the exporter, the Defendant and CEF Mr. Haslehurst (in paragraph 11 of his statement) described the Receivables Purchase Agreement Form as being between CEF and the exporter, as indeed it appears to be, notwithstanding that the Defendant is named as an approved buyer. The Defence did not allege in terms any contractual obligation owed by CEF to the Defendant. Moreover, no contractual claim by the Defendant against CEF was identified in argument even though Mr. Turner had expressly observed that no contractual obligation owed by CEF to the Defendant to pay 20% of the proceeds of the bills to the exporter had been identified. In those circumstances I do not consider that it is appropriate or fair for me to speculate as to whether one could construct an express or implied contractual obligation arising out of the discussions which it appears took place between the Defendant and CEF; see paragraphs 7-12 of Mr. Haslehurst’s witness statement which refers to a presentation of CEF’s services to the Defendant.

The Defendant has therefore not shown that it has a real prospect of establishing at trial that it could have set-off against CEF the sum claimed against it by the exporter in relation to the three earlier bills. It follows that the Defendant has also not shown that it has a real prospect of establishing at trial that it could set off against the Claimant’s claim the sum claimed by the exporter.

There are two further claims which the Defendant seeks to set off against the Claimant’s claim as holder for value of the bills. The exporter has made a claim for $27,500 against the Defendant for late payment. The debit note referred to simply claims “charges towards additional financial cost incurred due to non payment by CEF.” It is not clear what this additional cost is but no cause of action which would permit the Defendant to claim it against CEF has been identified.

The second claim is for a sum of £22,124 in respect of lost profits suffered by the Defendant caused by CEF’s failure to pay the exporter which led to the exporter being unable to make certain deliveries to the Defendant. Again, no cause of action which would permit the Defendant to claim this sum against CEF has been identified.

For these reasons the Defendant has failed to show a real prospect that at trial it would be able to set off the suggested claims against the Claimant’s claim under the bills claims. For the avoidance of doubt the Defendant has also failed to establish a real prospect of establishing at trial a counterclaim for the suggested sums.

Mr. Harrison submitted that there were in any event other reasons why summary judgment should be refused. Essentially these were that at trial there could be a detailed investigation of the relationship between the Claimant and CEF and how the IDA operated. In addition the circumstances in which the bills were indorsed could be investigated. These were said to be important enquiries in circumstances where the nature of the Claimant’s claim had undergone some changes in presentation. For example it was at first said that the Claimant was a holder in due course but it was now accepted that it was not. However, I was not persuaded that any of these enquiries were a good reason for ordering a trial in circumstances where the Defendant had failed to establish a real prospect of establishing a successful defence to the Claimant’s claim at trial.

For these reasons there will be summary judgment for the Claimant.

Had I reached the conclusion that one or more of the defences raised by the Defendant had a real prospect of success I would in any event have ordered that the Defendant pay into court the sum claimed. That is because bills of exchange are generally treated as cash and this is not a case where there has even arguably been a total or partial failure of the original consideration.