Abbot Investments (North Africa) Ltd v Nestoil Ltd

This is an application by the Claimant for summary judgment on its claim against the Defendant for a sum said to be due pursuant to a Guarantee. It was argued admirably and succinctly (on a Friday afternoon on a busy applications day in the Commercial Court) by Mr. Walker QC for the Claimant and by Mr. Kulkarni for the Defendant.

The background to the matter may be shortly described. The Claimant, Abbot Investments (North Africa) Limited, sold a company, KCA Tender Barges Pte. Limited to Momentum Far East Pte. Limited pursuant to a Sale and Purchase Agreement dated 15 August 2014. The sale was completed on 20 October 2014. Thereafter Momentum assigned its rights to Scorpio Mauritius. Much of the funding was provided by a group of companies which included the Defendant, Nestoil Limited. Part of the consideration took the form of a Loan Note in the sum of US$2m plus interest for a period of 12 months. The Defendant guaranteed payment of the Loan Note pursuant to the terms of a Guarantee dated 4 November 2014. The loan note fell due for payment on 20 October 2015 but was not paid and the Claimant now claims the sums due under the Loan Note from the Defendant as guarantor.

Proceedings were commenced and served in February 2016. On 25 May 2016 Scorpio Mauritius purported to rescind the SPA for fraudulent misrepresentation and Momentum also purported to rescind the Loan Note. The Defendant contends that the effect of these rescissions is to discharge it from liability under the Guarantee. The issue for the court on the present application is whether the Defendant has a real prospect of successfully defending the claim.

On behalf of the Claimant Mr. Walker QC submits that the Defendant has no real prospect of successfully defending the claim because:

The alleged fraudulent misrepresentation is that Mr. Thomson of the Claimant assured Mr. Larsen of Momentum that any liabilities in respect of the GLEN ESK (one of the three oil rigs owned by KCA but which did not form part of the sale of KCA) would not transfer to Momentum. Mr. Larsen has signed a witness statement dated 6 January 2017, the contents of which he confirms are true, in which he says that Mr. Thomson told him that “GLEN ESK would be “carved out” of the SPA, meaning that there would be no expenses or liabilities relating to GLEN ESK upon the acquisition of KCA”. He also said that all this would be “taken care of by Abbot” ie that Abbot would pay all these expenses and discharge these liabilities. Mr. Larsen was only able to identify one meeting when these assurances were given, namely, 12 August 2014 at Momentum’s offices.

On 20 October 2014 (the date of completion) the Claimant sent a Supplemental Disclosure Letter to Momentum which referred to an outstanding invoice in relation to GLEN ESK which was to be set off against an outstanding liability. The letter then said:

“This is the only outstanding liability in respect of the MOA. There are no outstanding obligations in respect of the MOA or the GLEN ESK, and [KCA] will not be subject to any future liabilities or claims arising from the sale of the vessel.”

This document is said to support the statements made by Mr. Thomson and to be a further misrepresentation that KCA had no liabilities in relation to the GLEN ESK.

The representations are said to be false because at completion KCA in fact had significant liabilities in respect of the GLEN ESK. I did not understand it to be disputed that there were in fact such liabilities to Stellar Logistics in a sum of over $400,000.

Mr. Walker submitted that the misrepresentation alleged had evolved over time from a letter dated 25 May 2016, to the Defence and finally to the statement of Mr. Larsen. He further submitted that there was a lack of clarity in the alleged misrepresentation (for example, it might refer to the future rather than being a statement of existing fact, and the phrase “taken care of” might simply mean that it would be dealt with in the completion accounts). He submitted that it was not corroborated by notes or emails. All these matters cast doubt on the alleged misrepresentation but, in my judgment, do not enable the Claimant to say at this stage that the evidence of Mr. Larsen is not credible. However, Mr. Walker said that Mr. Larsen’s later failure to mention the alleged misrepresentation when mention was made of sums due to Stellar Logistics enables the court to say that his evidence is not credible.

Mr. Walker relied upon several documents. There was correspondence on 29 October 2014 which referred to $423,000 of invoices and requested the information to be passed on to Mr. Larsen. It appears it was passed on between 12 and 17 November 2014. There was correspondence on 26 and 27 November 2014 involving Mr. Larsen when mention was made of payments relating to the Ivory Coast (which I was told included the sums claimed by Stellar Logistics). There was further correspondence on 12 January 2015 when reference was made to sums being chased by Stellar Logistics. There was correspondence between 17 and 19 March 2015 involving Mr. Larsen when reference was made to sums being chased. Finally on 1 June 2015 Mr. Larsen attached a list of creditors including Stellar Logistics and said he was making headway. It was said that if the allegations of misrepresentation were true it beggars belief that Mr. Larsen did not mention them. However, none of the correspondence refers in terms to GLEN ESK. In response Mr. Walker said that it was inconceivable that Mr. Larsen did not realise that they related to the GLEN ESK because a commercial entity will not assume an invoice is due; it will investigate and find out to what it relates.

These are powerful points to put to Mr. Larsen in cross-examination. In addition it was pointed out that he accepted in his witness statement that the GLEN ESK was stationed in West Africa which would have assisted him in understanding that the invoices related to the GLEN ESK. Further, the Management Accounts which he would have seen associated the GLEN ESK with Stellar Logistics. It may well be that Mr. Larsen will have no answer to these points when he is cross-examined. But I find myself unable to say that there is no real prospect that he will have no explanation as to why he did not mention the alleged misrepresentations at the time of the correspondence. Moreover, there is no witness statement from Mr. Thomson denying that the misrepresentations were made. I was told that he no longer works for the Claimant and that Mr. Larsen’s statement had only been recently provided. However, the fact remains that Mr. Larsen’s evidence is not yet challenged by Mr. Thomson.

Finally, on this part of the case, Mr. Walker submitted that there was no credible evidence that, if the misrepresentations were made, they were made fraudulently. But Mr. Kulkarni’s skeleton argument explained how the case on fraud was put. It was based upon recklessness as to whether what was said was true. He did not allege a nefarious motive but referred to evidence that the existence of the liabilities to Stellar Logistics was known to the Claimant at the material time. It may well be the case that recklessness without a motive is unlikely but I find myself unable to say that there is no real prospect of establishing that the misrepresentations were made without an honest belief in their truth and therefore fraudulently.

Mr. Walker said that there was no real prospect of establishing an effective rescission because the common law remedy of rescission was not available (a) where the SPA had been affirmed and (b) where restitution was not possible. It was said that the SPA had been affirmed by Scorpio Mauritius continuing to act as owner of the company and to demand payment pursuant to the very contract which they say has been rescinded. It was said that restitution was impossible because the vessels will have been used and that it was fanciful to suggest that the company or the vessels in its ownership could be returned in the same condition in which they had been transferred pursuant to the SPA.

Mr. Kulkarni had a response to these matters (it was necessary to show that Scorpio Mauritius knew it had a right to rescind not merely that they knew of the facts giving rise to the right to rescind, and that substantial restitution was sufficient) but his primary response was that if fraud were established then as a matter of construction of the Guarantee it could not oblige the Defendant to indemnify the Claimant in respect of a liability arising out its fraud. Clear words would be required showing that the Guarantee extended to such liabilities. In support of this submission he relied upon Canada Steamship Lines v R [1952] AC 192 and Capita (Banstead 2011) Ltd. v RFIB Group Ltd [2014] EWHC 2917 (Comm) at paragraph 15. Mr. Walker replied that the Guarantee extended to all losses which the Claimant “may otherwise incur if any obligation guaranteed by the Guarantor is or becomes totally or partially unenforceable, invalid or illegal as if the obligation guaranteed had not become unenforceable, invalid or illegal.” There was no real argument on the meaning of this clause but it is to be noted that it does not in terms to refer to losses arising out of fraud.

I concluded that if a fraudulent misrepresentation were established there was a real prospect that the Guarantee would not be construed as applying in such circumstances.

For these reasons the claim for summary judgment must be dismissed and it is unnecessary to consider Mr. Kulkarni’s submission that there is another compelling reason for trial, namely, that Momentum’s documents are not yet available and the Claimant has declined a request to disclose its side of that correspondence.

Mr. Walker submitted that if the claim for summary judgment were dismissed the court should make a conditional order that the sum claimed should be paid into court. At the hearing Mr. Kulkarni did not have any further submissions to make in relation to this submission. It was not suggested that the Defendant was impecunious and so could not make a payment of US$2m. into court. However, on 30 January 2017 when the court wished to hand down judgment Mr. Kulkarni requested time to put in evidence showing that the Defendant was impecunious and that a conditional order should not be made. The court acceded to that submission and so, between 8 February 2017 and 29 March 2017, there was an exchange of evidence on that subject. On 1 and 7 April 2017 counsel made submissions in writing on the question and requested the court to deal with the matter on paper without a further hearing.

Mr. Walker submitted that the evidence adduced by the Defendant, when considered in the light of the evidence adduced by the Claimant, failed to show that a conditional order would prevent the Defendant from being able to litigate this matter. He submitted that the last audited accounts of the Defendant (to December 2013) showed that the Defendant was a company of substantial means and that there was no “hard evidence” to support assertions made that the Defendant was unable to pay US$2m. into court. Further, there was no credible evidence that the Defendant could not obtain US$2m. from Dr. Obijiesi (its principal shareholder) or from one of its affiliated companies. In short it was “clear from the evidence that the Defendant would not be prevented from defending the claim by the making of the conditional order.”

Mr. Kulkarni made a number of submissions in response. First, he submitted that before making a conditional order the court must identify the purpose of imposing a condition and satisfy itself that the condition it has in mind represents a proportionate and effective means of achieving that purpose. If a defendant has an arguable case, even if it is weak or improbable, any conditional order that the defendant pay into court security for the claim must be imposed with great caution. The mere fact that the defendant has an arguable but weak case will not usually be enough to justify such an order. Something more is usually required, concerning the way in which the defendant has conducted itself in relation to the litigation. If such an order will stifle a defence it will only be in an exceptional case where such an order will be made. Reliance was placed on Deutsche Bank v Unitech Global [2016] 1 WLR 3598, Huscroft v P&O Ferries [2011] 1 WLR 939, Olatawura v Abiloye [2003] 1 WLR 275, Ali v Hudson [2004] CP Rep 15 and Shagang Shipping v HNA Group [2014] EWHC 2241 (Comm). Second, applying those principles, the present is not a case where it would be appropriate to make a conditional order securing the entire sum claimed. Third, whereas in the context of security for costs applications it is correct that the respondent who claims to be impecunious must show that he cannot provide security either from his own resources or from outside sources including directors and shareholders, the same is not true in the context of conditional orders requiring security to be provided for a claim. Fourth, on the evidence the court should find that the Defendant cannot cover its day-to-day operational costs, that its assets are all subject to a charge and that obtaining further credit facilities is wholly unrealistic. In so far as it is legally relevant the Defendant is unable to raise the necessary funds from Dr. Obiejesi.

The court’s jurisdiction to make such an order is not found in CPR Part 24 which deals with applications for summary judgment. It is to be found in CPR 3.1(3); see Deutsche Bank v Unitech Global [2016] 1 WLR 3598 at paragraphs 72-77. CPR Part 24.6 provides that the court determining a summary judgment application may give directions for the filing of a defence and notes that CPR Part 3.1(3) provides that the court may attach conditions when it makes an order. PD 24 paragraph 4 provides that where the court considers that it is possible that a defence may succeed but improbable that it will do so, the court may make a conditional order. Paragraph 5 provides that such an order may require a party to pay a sum of money into court.

Since the court’s jurisdiction stems from CPR Part 3.1(3) it follows from the judgment of Moore-Bick LJ in Huscroft v P&O Ferries [2011] 1 WLR 939 at paragraph 19 that “before exercising a power given by rule 3.1(3) the court should identify the purpose of imposing a condition and satisfy itself that the condition it has in mind represents a proportionate and effective means of achieving that purpose ……………”

Where the making of such an order may stifle the defence the court will only make such an order in an exceptional case; see Olatawura v Abiloye [2003] 1 WLR 275 at paragraph 22 and Ali v Hudson [2004] CP Rep 15 at paragraph 40.

Mr. Kulkarni relied upon the statement by Simon Brown LJ in Olatawura v Abiloye [2003] 1 WLR 275 at paragraph 26 that an order for security for costs will usually not be justified merely because the claim or defence is “somewhat weak”. Simon Brown LJ stated that “the court will be reluctant to be drawn into an assessment of the merits beyond what is necessary to establish whether the person concerned has “no real prospect of succeeding” and the occasions when security for costs is ordered solely because the case appears weak may be expected to be few and far between.” Mr. Kulkarni submitted that the same approach must apply when the court is considering making an order that a sum be paid into court to secure a claim. In my judgment care must be exercised when considering what is meant by a “weak” case in this context. Obviously, the fact that a court may consider that a defence is only just more likely to fail than succeed would not justify a conditional order. But where a defence is very likely to fail because, for example, the evidence relied upon appears to be inconsistent with the contemporaneous documents, such circumstances are typically regarded as justifying an order for payment in of a sum of money which will secure the claim; see, for example, Homebase Limited v LSS Services Limited [2004] EWHC 3182 (Ch) per Peter Smith J. at paragraphs 31-34. In this regard it is, I think, significant that in Olatawura v Abiloye [2003] 1 WLR 275 at paragraph 23 Simon Brown LJ referred to orders under the old rules for payment in securing a claim in respect of an “unpromising defence.” He did not say that the court’s discretion to make such orders was now more restrictive. On the contrary, he observed that CPR 24 is now wider than it was before and enables payments in to be made to secure the defendant’s costs of an “unpromising claim.” Although PD 24 paragraph 5 notes in parenthesis that the court will not follow its former practice of granting leave to a defendant to defend a claim, whether conditionally or unconditionally, that merely reflected a change in the form of the order (to a conditional order as defined in PD 24 paragraph 5). In the light of PD 24 paragraph 4 (which provides that the court may make a conditional order when a claim or defence is improbable) it is unlikely that the previous practice of ordering a payment in of the whole or part of the sum claimed when the defence appeared particularly weak was intended to be changed. Peter Smith J in Homebase Limited v LSS Services Limited [2004] EWHC 3182 (Ch) at paragraph 33 referred to the case where doubts were raised by the contemporaneous evidence as a “classic justification” for a conditional order. Mr. Kulkarni relied on the decision of Flaux J. in Shagang Shipping v HNA Group [2014] EWHC 2241 (Comm). However, that was a case where a defence of bribery was alleged by amendment in circumstances where it was supported by a report of the Chinese police. The claimant did not seek to say that the application to amend should be refused on the grounds that it had no real prospect of success but said that permission to amend should only be given on terms that security was provided for the costs dealing with the defence on the grounds that the defence was concocted, a sham or shadowy. Those grounds were not supported by evidence; see paragraphs 7-9. The judge refused to make a conditional order because the defence was arguable, it had a reasonable prospect of success and the claimant had no evidence to suggest that it was a sham. It is a very different case from a case, like the present, where although it cannot be said that the defence has no real prospect of success there are real grounds to doubt the reliability of the evidence on which it is based.

In the present case the Claimant have been able to raise justifiable doubts about the credibility of Mr. Larsen’s testimony by reason of the “evolution” of the suggested defence of fraudulent misrepresentation and the failure of Mr. Larsen to mention the suggested defence in the contemporaneous documents; see paragraphs 9 and 10 above. Thus the defence, whilst it is possible that it may succeed, is particularly weak and very vulnerable to attack.

In such circumstances the purpose of making a conditional order requiring payment in to court is to provide security in respect of a particularly weak defence. The proposed order is that US$2m. be paid into court. That is almost 100% of the sum claimed of $2,190,146.69. The defence relates to the totality of the claim and so the proposed order represents a proportionate and effective means of achieving that purpose. The proposed conditional order should therefore be made unless, of course, it would probably stifle the defence.

On that matter the burden of proof lies on the Defendant to show that the order would probably stifle the defence because the Defendant would be unable to make the payment in. In this regard there is, in my judgment, no reason for a different test from that which applies where security for costs is applied for. Where there is an application for security for costs the respondent must satisfy the court that it is probable that the claim would be stifled. That involves consideration not only of the question whether the respondent can provide security from its own resources but also of the question whether it can raise the amount from outside resources, for example its directors or shareholders; see Keary Developments v Tarmac Construction [1995] 3 AER 534. In the present context the issue is whether the proposed order that US$2m. be paid into court would stifle the defence. Although Mr. Kulkarni has submitted that regard to the principle of separate corporate personality in Salamon v Salamon [1897] AC 22 prevents the court from considering outside resources in the present context I am unpersuaded. In both cases, security for costs and security for the claim, the question is the same, is it probable that the order will stifle the claim or the defence. If a defendant can raise the necessary payment from directors or shareholders then it is not probable that the defence will be stifled. Mr. Kulkarni submitted in the alternative, by reference to the jurisprudence on non-party costs orders pursuant to section 51 of the SCA 1981, that it would only be in rare or exceptional cases that it would be appropriate to consider outside resources. Again I see no reason for such a limitation. The court is concerned with a simple factual enquiry, is it probable that the order will stifle the defence. In answering that question it is legitimate to consider both the defendant’s own resources and those available to the defendant from others such as directors and shareholders. Were the position otherwise a true answer could not be given to the question, is it probable that the order will stifle the defence.

I can now turn to the evidence.

The Defendant’s last audited accounts date from December 2013. They state that the activities of the Defendant and its operating subsidiaries are the provision of engineering services, equipment procurement, fabrication and installation, drilling, pipeline construction, maintenance and repairs and other services. It had total assets of US$386m. and retained earnings of US$104m. These accounts date from almost 3-4 years ago. The oil price has fallen and Nigeria is in recession. The audited accounts are not therefore of great relevance.

The Defendant has produced its internal and unaudited accounts for the year to December 2016. They indicated fixed assets of US$237m. and a leasehold interest of US$6.8m. They also indicate receivables of US$624m. from various debtors and intercompany balances. Reference is made to retained earnings of US$135m. Income (net of costs) for the year ended 31 December 2016 is stated to be some US$79m. This evidence would suggest that the Defendant was able to pay US$2m. into court

In response it is said by Mr. Ejinima, the head of corporate finance for the Obijackson Group which included the Defendant, that finance cannot be raised from the Defendant’s assets because a fixed and floating charge debenture prevents it from selling its assets. He disclosed the debenture dated 29 December 2005. However, the assets covered are said to be contained in a schedule which does not appear to have been disclosed. With regard to the receivables he said that they are outstanding and have been so from some time. He says that any form of receivables discounting would therefore be “unattractive” and points to the fall in the oil price and the recession in Nigeria. However, no evidence is given as to whether attempts to raise US$2m. would in fact fail. With regard to the net income he says that this is a reference to “milestones” in the Defendant’s contracts and is not a “cash entry”. However, this appears contrary to the unaudited accounts which refer to contract income and itemise the direct and other costs incurred to earn that income. In view of the deficiencies in the evidence to which I have referred, Mr. Ejinima’s evidence as to the internal and unaudited accounts lacks cogency.

Mr. Ejinima says that the Defendant does not have sufficient cash to make the payment in of US$2m., is overdrawn and has substantial bank borrowings. Staff wages could not be paid in January 2017. It is “struggling” to meet its legal bills. The company’s position is “parlous” which is said to result from two investments made in 2014 which have suffered from the fall in the oil price and the unstable security in the Niger delta region. However, little documentary support is provided to support the apparently dire nature of the Defendant’s finances. No evidence is given of the expenses in fact being incurred by the Defendant.

Letters from banks are disclosed which reveal unpaid interest at the end of December 2016; see the letter from Union Bank dated 9 December 2016. Some US$3.1m. was payable on 31 December 2016. There is no evidence that that was not paid. A letter from Access dated 5 January 2017 refers to an outstanding debt of $228m. A further letter dated 3 February 2017 requests a detailed repayment plan. The Defendant’s reply has not been disclosed. A letter dated 21 October 2016 from Diamond requires repayment of US$7.4m by 31 December 2016. A further letter dated 2 February 2017 requests a meeting on 15 February 2017. No evidence has been given about that meeting or as to the Defendant’s proposals for repayment.

Whilst it appears clear that the Defendant is having difficulty in meeting its obligations the court is left in doubt as to the precise financial position and in particular as to whether the sum of US$2m. (which appears relatively modest compared with some of its debts) cannot be paid. The company still appears to be a going concern. There is no evidence that it is not. In those circumstances some operating costs must be being paid. Notwithstanding the evidence of Mr. Ejinima in his second and third witness statements, I am not persuaded that if a conditional order is made for the payment in of US$2m. the defence would probably be stifled because the Defendant would probably be unable to make the payment in.

It follows that it is appropriate to make a conditional order. It is therefore unnecessary to consider whether the sum of US$2m., if it cannot be raised from the Defendant’s own resources, can be raised from Dr. Obijiesi. I shall therefore deal with this matter shortly. He is the major shareholder in the Defendant (and in other companies in the group). There is evidence that he is a very rich man, indeed “one of Nigeria’s richest men”. Mr. Ejinima does not deny this but says that he is informed that Dr. Obijiesi is not able or willing to lend US$2m. Mr. Ejinima seeks to explain why funds cannot be raised by Dr. Obijiesi from certain companies but he does not say why Dr. Obijiesi, a major shareholder in the Defendant and a very rich man, is unable to lend US$2m. to the Defendant from his own resources. If necessary, I would have concluded that the Defendant had not established that Dr. Obijiesi was probably unable to lend the Defendant US$2m. to fund the payment in. On the contrary I would have found that he probably could.

For these reasons I shall make a conditional order that the Defendant pay US$2m. into court, failing which the Claimant may enter judgment. I invite the parties to agree the form of the appropriate order.