Kallakis v AIB Group Plc & Ors

This is the reserved judgment on the application by the first, second and fifth defendants (“AIB”) for summary judgment and/or strike out (the “Application”).

The Application was made on 26 July 2019. The defendants rely on a witness statement of Ms Vanessa Whitman dated 26 July 2019 in support of the application and a second witness statement from Ms Whitman dated 13 December 2019. Ms Whitman is a solicitor at CMS CameronMcKenna Nabarro Olswang LLP, solicitors to AIB, having day-to-day conduct of this matter

In response the claimant relies on his own witness statement dated 31 October 2019.

There were two further witness statements before the court, neither of which were relevant to the issues to be determined: one an unsigned witness statement which the claimant says was produced by Mr Michael Cooke, a former employee of AIB, and a witness statement of Mr Andrew Makins dated 29 October 2019. In correspondence it was denied that Mr Cooke made the witness statement. The claimant subsequently obtained a witness summons requiring the attendance of Mr Cooke at the hearing of the Application. However in view of the fact that the witness statement goes largely to the issue of the price obtained on the sale of the properties and having heard the way that the Application was put by counsel for AIB in oral submissions, the court ruled that it was not necessary to hear oral evidence from Mr Cooke to determine the Application.

There is also an application by AIB (the “Variation Application”) in the event that the

At the hearing the claimant appeared in person and AIB was represented by counsel. The third and fourth defendants were not represented and did not appear.

The court exercised its discretion to allow the claimant’s McKenzie friend, Mr Darren Stapleford, to address the court on behalf of the claimant. Mr Stapleford told the court that he was called to the Bar in 2011 but is not currently practising, he was not being paid for his attendance but was familiar with the matters in issue having assisted the claimant in, amongst other things, drafting documents including the skeleton argument. Having regard to these factors and the complex nature of the issues raised on this Application, it was in furtherance of the overriding objective for Mr Stapleford to be granted rights of audience on this occasion.

The background to these proceedings is taken largely from the first witness statement of Ms Whitman.

In summary, the fifth defendant, Allied Irish Banks plc (the “Bank”) was introduced to the third defendant who is the father of the claimant. The Bank entered into a number of transactions between October 2003 and November 2007 pursuant to which the Bank lent in excess of £740 million to 14 companies controlled by the third defendant for the purpose of purchasing freehold or long leasehold properties in England. The companies were special-purpose vehicles (“SPVs”) incorporated in the BVI which each held a property. The fourth defendant, Michael Becker, was the sole director and shareholder of each of the SPV companies.

The structure advanced by the third and fourth defendants was in fact a sham. In September 2008 the Bank discovered that documentation supposedly entered into by Sun Hung Kai Properties Ltd in connection with the properties was not genuine.

Negotiations took place between the Bank and lawyers for the third defendant over the period from September 2008. As part of those negotiations, whilst not accelerating the facilities or enforcing its security, the Bank required the third defendant to procure the payment of all rents due from tenants to an account controlled by the Bank. On receipt of those monies, the Bank allocated the funds first to discharge outstanding capital and then to interest. As a result, there was a shortfall in the amount received in respect of the interest amount due on the October payment date and thus a payment default under the facilities. Notwithstanding the default, negotiations appeared to continue regarding arranging a sale of the properties but without warning, the Bank effectively broke off the negotiations on 20 November 2008 serving notice of default under the Facility Agreements and the following day, on 21 November 2008, and in purported exercise of its power of sale, completing the sale of the properties as mortgagee that same day. The properties were sold to 14 individual entities which form part of the Green Property Group (“Green”). The purchase by those entities were funded by AIB through facilities granted to them by AIB which included a provision for additional amounts to be paid if the properties were resold.

The Bank denies that the terms of the sale to Green and the associated lending were unusual and further denies that the sale was at an undervalue. The Bank asserts that it did not profit from the sale to Green.

The third defendant and his business associate Alex Williams were subsequently found guilty in 2013 of conspiring together with the fourth defendant to defraud the Bank by causing the Bank to advance monies for the purpose of funding the purchase of properties by companies owned or controlled by the third defendant.

It appears to be common ground that the SPVs were struck off the BVI register in

The claimant is 21 years old. He was therefore a minor at the time of the events in 2008 and was not involved. However he asserts that he is a beneficiary under the

By the present proceedings, the claimant brings three claims (together the “Claims”) which in summary are as follows:

The basis of the Claims advanced by the claimant are:

The Claims which the claimant seeks to bring on behalf the Trustee are said to be:

CPR3.4 (2) states:

“The court may strike out a statement of case if it appears to the court –

(a)

that the statement of case discloses no reasonable grounds for bringing or defending the claim;

…”

CPR 24.2 states:

“The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if – (a) it considers that –

(i)

that claimant has no real prospect of succeeding on the claim or issue; or

(ii)

that defendant has no real prospect of successfully defending the claim or issue; and

(b)

there is no other compelling reason why the case or issue should be disposed of at a trial.”

AIB referred the court to the summary of the relevant principles as set out in the judgment of Picken J in Magdeev v Tsvetkov [2019] EWHC 1557 (Comm). At [30] the judge stated:

“The principles by reference to which a claim's prospects of success should be assessed at the strike out/summary judgment stage were summarised by Lewison J (as he then was) in Easyair Limited v Opal Telecom Limited [2009] EWHC 339 (Ch) at [15] (approved by the Court of Appeal in AC Ward & Sons Ltd v Catlin (Five) Ltd [2009] EWCA Civ 1098 at [24]). They are as follows:

"i)

The court must consider whether the claimant has a 'realistic' as opposed to a 'fanciful' prospect of success: Swain v Hillman [2001] 2 All ER 91.

ii)

A 'realistic' claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8].

iii)

In reaching its conclusion the court must not conduct a 'mini-trial': Swain v Hillman.

iv)

This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10].

v)

However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550.

vi)

Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63 .

vii)

On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it…."”

“AIB also referred to PD3A 1.4 and submitted that the case will be suitable for strike out if it pleads a “coherent set of facts but those facts, even if true, do not disclose any legally recognisable claim against the defendant”.

I also note St Vincent General Partner v Robinson [2018] EWHC 1230 (Comm) at

The claimant seeks to bring a claim on behalf of the Trustee either relying on the assignment of the claim of the Trustee to the claimant (Basis 2) or a derivative claim (Basis 3). The claim of the Trustee is either on the basis of a derivative claim on behalf of the SPVs or a personal claim of the Trustee.

In relation to the derivative claim of the Trustee, it was submitted for AIB that the fact that the SPVs have been struck off the register is fatal to the derivative claim as a claim cannot be advanced on behalf of a non-existent legal entity: Shareholder Actions 2^nd ed at 6.49.

It appears to be common ground that the law that governs the right of a shareholder to bring a derivative claim in England is, as a matter of English conflicts law, the law of the country of incorporation of the company concerned: Konananeni v. Rolls Royce Industrial Power (India) Limited and others [2002] 1 WLR 1269. There was no evidence before the court as to the position under the law of BVI if the company had been struck off the register nor whether a company could be restored to the register for the purpose of bringing a derivative claim.

Further I note that (although the provisions do not apply to foreign companies) Section 260(1) of the Companies Act 2006 defines a “derivative claim” as one brought by “a member of a company (a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company”. By analogy therefore it seems to me that as a matter of English law that the claim is brought by the Trustee as the shareholder and not the SPV.

I therefore reject the submission that this is fatal to the derivative claim.

It was further submitted for AIB that if a derivative action could be brought notwithstanding the fact that the SPV has been struck off, or the SPV could be restored to the register in the BVI, in order to bring a derivative action, the permission of the court in the BVI is required under s184C of the BVI Business Companies Act 2004. It was submitted that this is a substantive requirement in order to give the claimant standing: Novatrust v Kea Investments [2014] EWHC 4061 at [38]-[46]. At [38] the judge said:

“In my judgment the effect of s.184C(6) is that by BVI law amember of a company does not have the right to bringproceedings in the name of or on behalf of a company unlessthat member has complied with the other provisions withins.184C and that is so whether the proceedings are to be broughtin the courts of the BVI or elsewhere. Absent this provision I would have agreed that the requirement for leave from the BVI Court was procedural. However, the effect of s.184C(6) is that before the member of a BVI company can have the right to bring derivative proceedings in respect of that company, permission has to be obtained by that member from the BVI High Court (“the Court” being defined for these purposes by s.2 of the act as meaning the BVI High Court). Obtaining thatpermission is a condition precedent to the ability of the memberto bring such proceedings. That provision is entirely general in effect. It is common ground between the experts in this case that the effect of s.184C(6) is to preclude the existence of a parallel common law system relating to derivative claims in the BVI. There is nothing within s.184C that suggests its scope is confined either generally or in part to domestic BVI proceedings. There is first instance authority in the BVI that suggests at least by implication that s.184C(6) applies in relation to derivative proceedings to be brought outside the BVI as it applies to proceedings before the courts of the BVI – see Microsoft Corporation v. Vadem Limited BVI HC (Com). It is noteworthy that neither party in that litigation appears to have suggested otherwise. In those circumstances I consider it fanciful to suggest that Novatrust has the right to bring such proceedings in the English courts in the absence of such permission.” [emphasis added]

It was submitted for AIB that these findings of the English court as to BVI law are admissible under section 4(2) of the Civil Evidence Act 1972, notice having been given by service of the first witness statement of Ms Whitman.

Section 4(2) of the Civil Evidence Act 1972 states:

“Where any question as to the law of any country or territory outside the United Kingdom, or of any part of the United Kingdom other than England and Wales, with respect to any matter has been determined (whether before or after the passing of this Act) in any such proceedings as are mentioned in subsection (4) below, then in any civil proceedings (not being proceedings before a court which can take judicial notice of the law of that country, territory or part with respect to that matter)—

(a)

any finding made or decision given on that question in the first-mentioned proceedings shall, if reported or recorded incitable form, be admissible in evidence for the purpose of proving the law of that country, territory or part with respect to that matter; and

(b)

if that finding or decision, as so reported or recorded, is adduced for that purpose, the law of that country, territory or part with respect to that matter shall be taken to be in accordance with that finding or decision unless the contrary is proved:

Provided that paragraph (b) above shall not apply in the case of a finding or decision which conflicts with another finding or decision on the same question adduced by virtue of this subsection in the same proceedings.” [emphasis added]

I was not addressed in oral submissions on the scope of section 4 of the Civil Evidence Act. However I note that subsection (5) states:

“(5)

For the purposes of this section a finding or decision on any such question as is mentioned in subsection (2) above shall be taken to be reported or recorded in citable form if, but only if, it is reported or recorded in writing in a report, transcript or other document which, if that question had been a question as to the law of England and Wales, could be cited as an authority in legal proceedings in England and Wales”.

The decision in Novatrust was a jurisdictional challenge and there was therefore in this regard only a finding as to whether there was a real issue to be tried. In my view therefore the finding as to the law of the BVI was not a finding which if it had been a question of English law could be cited as authority. Accordingly the issue of whether permission is a substantive provision as a matter of BVI law is a matter to be established. AIB has not shown that there is no real prospect of the claimant/Trustee bringing a derivative action on the ground that without the permission of the BVI court, the claimant/Trustee has no standing to bring the claim.

It was submitted for AIB that the claimant had not complied with the procedure applicable to company derivative actions in CPR 19.9 to CPR 19.9F. In particular it was submitted that CPR 19.9 provides that where a derivative claim is made on behalf of a company, the company must be made a defendant to the claim and, after the issue of the claim form, the claimant must not take any steps in the claim without first obtaining the court’s permission.

CPR 19.9 provides:

“(1)

This rule—

(a)

applies to a derivative claim (where a company, other body corporate or trade union is alleged to be entitled to claim a remedy, and a claim is made by a member of it for it to be given that remedy), whether under Chapter 1 of Part 11 of the Companies Act 2006 or otherwise; but

(b)

does not apply to a claim made pursuant to an order under section 996 of that Act.

(2)

A derivative claim must be started by a claim form.

(3)

The company, body corporate or trade union for the benefit of which a remedy is sought must be made a defendant to the claim.

(4)

After the issue of the claim form, the claimant must not take any further step in the proceedings without the permission of the court, other than—

(a)

a step permitted or required by rule 19.9A or 19.9C; or

(b)

making an urgent application for interim relief.”

A derivative claim under the Companies Act 2006 applies only to UK incorporated companies: s.260(2) provides that a “derivative claim” may only be brought under the Companies Act 2006 or with the permission of the court under s.994. It would therefore appear that a derivative claim in respect of a foreign company falls outside the statutory provisions and may be pursued independently of it. Lawrence Collins J held in Konamaneni at [44], that:

“there is no basis for restricting CPR r.19.9 to English companies, and in any event to do so would not have the effect of depriving the court of jurisdiction to entertain a derivative claim”.

It was submitted for the claimant that CPR 19 does not apply to claims made by shareholders against a third-party wrongdoer as opposed to a company insider.

Section 260 (3) provides:

“(3)

A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).”

It is thus limited to causes of action which arise from a breach of duty or breach of trust by a director. However whilst there is no definition of a derivative action, it seems to me that the language of CPR 19.9 in referring to “whether under Chapter 1 of Part 11 of the Companies Act 2006 or otherwise” [emphasis added] does encompass derivative claims which are brought outside the statutory regime.

If the provisions of CPR 19.9 apply, it seems to me that it would be open to the claimant to make a retrospective application for permission under CPR 19.9. However it was submitted for AIB that even if a permission application had been made, there is serious doubt as to whether permission would have been granted as the question of whether a derivative claim can be brought is governed by the common law exceptions to the rule in Foss v Harbottle: Hollington on Shareholder Rights at 6-08.

I accept that this is not a case where the claimant alleges that the claim was being stifled by the wrongdoer so the “fraud on the minority” exception does not apply. Further the claim does not arise from a breach of duty or other default by a director. I have regard to the following summary of the law in Iesini v Westrip Holdings [2009] EWHC 2526 (Ch) at [73]-[75]:

“73.

I should begin by saying a little about derivative claims generally. In the first place the new code has replaced the common law derivative action. A derivative claim may “only” be brought under the Act. As section 260 (1) makes clear a derivative claim is one in which the cause of action is vested in the company, but where the claim is brought by a member of the company. This reflects the old law in which a derivativeaction was an exception to the general principle (known as therule in Foss v Harbottle (1843) 2 Hare 461) that where aninjury is done to a company only the company may bringproceedings to redress the wrong. Allied to this principle wasthe principle that whether a company should bring proceedingsto redress a wrong was a matter that was to be decided by thecompany internally; that is to say by its board of directors, orby a majority of its shareholders if dissatisfied by the board'sdecision. The court would not second guess a decision made by the company in accordance with its own constitution. Theexception to these principles was necessitated where thecompany's own constitution could not be properly operated. Ifthe wrongdoers were in control of the company (because theywere a majority of the shareholders) they would not in practicevote in favour of taking proceedings against themselves, eventhough the taking of proceedings would be in the company'sbest interests…

75.

A derivative claim, as defined by section 260 (3) is not, however, confined to a claim against the insiders. As the concluding part of that sub-section says, the cause of action may be against the director or another person (or both). Nevertheless the cause of action must arise from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. A derivative claim may “only” be brought under Part 11 Chapter 1 in respect of a cause of action having this characteristic (although this restriction does not appear to apply to a derivative claim brought in pursuance of an order made under section 994). Thus the section contemplates that a cause of action may arise from, say, the default of a director, but nevertheless is a cause of action against a third party. A claim against a person who had dishonestly assisted in a breach of fiduciary duty or who had knowingly received trust property would be paradigm examples. It is also to be noted that it is not a requirement that the delinquent director should have profited or benefited from his misconduct. He may be guilty of no more than negligence in managing the company's affairs. However,since the cause of action must arise from his default (etc.) aderivative claim brought under Part 11 Chapter 1 will not allowa shareholder to pursue the company's claim against a thirdparty where that claim depends on a cause of action that hasarisen independently from the director's default (etc.). This view would be consistent with what the Law Commission said in their report Shareholders' Remedies which paved the way for this part of the Companies Act 2006. They said:

“6.31

So far as the second situation is concerned, one respondent gave the following example. A profitable company is a victim of a tort by a third party, and the board, although otherwise committed to the well-being of the company, have ulterior motives of their own for not wishing to enforce the remedy for the tort. Although the board would in those circumstances be in breach of duty, their breach would not have given rise to the claim.

6.32

We accept that in this type of situation an individual shareholder would have no right to bring a derivative action against the third-party tortfeasor under our proposals. (There would of course be a potential claim for damages against the directors themselves, although this may give rise to difficulties of causation or quantification, and it is possible that the directors may not have sufficient funds to meet the claim).

However, we do not consider that this is an issue which needs to be addressed for two main reasons.

6.33

First, we are not aware of any cases under the current lawwhere a derivative action has been successfully brought incircumstances such as those described in paragraph 6.31.

6.34

Secondly, (and more importantly) it is consistent with theproper plaintiff principle which we endorsed in the consultation paper and which received virtually unanimous support on consultation. The decision on whether to sue a third party (i.e. someone who is not a director and where the claim is not closely connected with a breach of duty by a director) is clearly one for the board. If the directors breach their duty in decidingnot to pursue the claim then (subject to the leave of the court) aderivative claim can be brought against them. To allow shareholders to have involvement in whether claims should be brought against third parties in our view goes too far in encouraging excessive shareholder interference with management decisions. This is particularly important as we are proposing that derivative actions are to be available in respect of breaches of directors' duties of skill and care. A line has to be drawn somewhere and we consider that this is both a logical and clearly identifiable place in which to draw the line.” [emphasis added]

Although the passages cited above would suggest that the position at common law is not certain, it supports a conclusion that a claim outside the Act in the circumstances of the present case would not succeed on common law principles. It seems to me therefore that there is no real prospect of permission being granted under CPR 19.

For these reasons I find therefore there is no real prospect of a derivative claim on behalf of the SPVs succeeding at trial.