England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE MAYOR'S AND CITY OF LONDON COUNTY COURT
HIS HONOUR JUDGE BIRTLES QC

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/02/2011

Lady Justice Arden (giving the judgment of the Court):

1. By an order dated 5 May 2010, HHJ Birtles QC gave judgment against the appellant, Mr Simon Lewis, and in favour of Bright Asset Ltd ("Bright Asset"), in the sum of £51,112.50, plus interest and costs, in respect of success fees payable under a consultancy agreement dated 9 August 2006 ("the agreement"). Mr Lewis now appeals. He contends that the judge was wrong on certain points of interpretation of the agreement.
2. The agreement provided for Bright Asset to give financial advice to Mr Lewis about the debts of Hi-Gear Leisure plc ("HG"), a company of which he was managing director. Fees were to be paid by reference to the "aggregate replacement and new debt committed", which we will call "index debt committed".
3. The points of interpretation of the agreement in issue on this appeal are as follows:

Issue (1) (the 'which obligor?' issue): whether under the agreement the index debt committed was not only that of HG but also that of the vehicle used to acquire its business and assets, namely Cool Brands Ltd ("CB"); and

Issue (2) (the 'which indebtedness?' issue) if the answer to Issue (1) is yes:

(i) (the IDF issue) whether under the agreement the index debt committed included the amount of funding which CB obtained by way of an invoice discounting facility ("IDF"), which involved not the raising of loans by CB but the sale of its invoices for cash, and

(ii) (the deferred purchase price issue) whether under the agreement the index debt committed included the amount of purchase price paid by CB for the business of HG on the grounds that it was not payable immediately but deferred.

Background

4. The background so far as material is as follows.
5. Prior to the end of 2006 or thereabouts, Mr Lewis was the managing director of HG, a sports and camping equipment supplier, and owned 3% of its shares. HG had subsidiaries but nothing turns on that fact, and accordingly when we refer to HG, we include, where appropriate, members of its group.
6. HSBC extended facilities of about £3m by way of loan or overdraft, secured by a charge which would have given HSBC the power to appoint an administrator. In addition, HSBC provided HG with an IDF, with a limit of about £3m, which enabled HG to sell its unpaid invoices to it at a discount for immediate cash.
7. In early 2006, HG was in financial difficulties. HSBC arranged for a business review to be carried out. This showed that HG was technically insolvent and that it would need additional cash to survive. HSBC wished to secure its exit as banker to HG. Mr Lewis looked for new forms of business finance. HG's advisers, UHY Hacker Young, introduced Mr Lewis to Mr Gullan of Bright Asset with a view to Mr Gullan assisting Mr Lewis to find a way forward. On its notepaper, Bright Asset described its business as "corporate debt solutions".
8. There were discussions between Mr Gullan and Mr Lewis. Mr Gullan explained the sort of services that he could provide to protect Mr Lewis's interest in the business. This included various different forms of refinancing scheme, including schemes which might involve an insolvency process for HG.
9. Bright Asset and Mr Lewis entered into the agreement which was contained in a letter dated 9 August 2006 from Bright Asset to Mr Lewis. Mr Lewis countersigned this agreement on 10 August 2006.
10. On 29 September 2006, CB was formed. The majority of shares were owned by Consortium Partners Ltd ("CPL"). Mr Lewis also owned a small shareholding. CPL was owned by associates of Mr Lewis. Mr Lewis was managing director of CB. CPL made a loan of £100,000 to CB.
11. On 22 December 2006, HG went into administration.
12. On 19 January 2007 the administrators of HG agreed to sell its assets to CB. This transaction was completed on 22 January 2007. The agreed price was £800,000, payable by instalments beginning on 31 March 2007 and ending on 31 October 2007. The judge found that HSBC was partially repaid through the administration of HG and the sale of its business and assets to CB. Accordingly, HSBC took what is known in the market as a "haircut".
13. On 7 February 2007, CB entered into an IDF with the Bank of Ireland, trading as Enterprise Finance Europe ("EFE"), with a limit of £2m.
14. On 8 February 2007 Bright Asset sent Mr Lewis an invoice for the success fees due under the agreement. These were calculated by reference to three components, which on Bright Asset's case together constitute the index debt committed:

i. the £100,000 loan made by CPL;

ii. the £800,000 purchase price paid to the administrators; and

iii. the £2m IDF.

15. The total fee (net of sums paid on account) was £43,500, which with the addition of VAT made £51,112.50.

The agreement

16. The letter dated 9 August 2006 began with the following preamble:

"Following our recent discussions, we write to confirm the terms and conditions upon which we will provide you with consultancy services, in relation to your interests in [HG] and its subsidiaries ("the Business")."

17. Under the agreement, the services to be provided by Bright Asset were to:

"comprise advising you in connection with the debts of the Business, specifically in relation to the full or partial repayment and/or exit of the incumbent debt provider, possibly via an insolvency process. In this connection, we will target and canvas new debt providers, facilitate the provision of information and assist you with negotiations."

18. Clauses 2, 3, 4 and 5 of the agreement provided as follows:

"Financial regulation

2. We will not provide investment advice and issues relating to equity are beyond the scope of our Services.

3. We confirm that, in connection with the Financial Services and Markets Act 2000 ("the Act"):

3.1 The debt providers to whom we will introduce you will be authorised, exempt from authorisation or not otherwise unlawfully carrying on regulated services.

3.2 The debt instruments which are the subject of our Services are not specified investments for the purposes of section 22 of the Act.

Fees and expenses

4. Success fees, payable upon completion and subject to a minimum of £25,000 of:

4.1 1.5% of the aggregate replacement and new debt committed by sources introduced by you; and

4.2 2.5% of the aggregate replacement and new debt committed by other sources, and

for the purposes of calculating our success fees, we will exclude funds disbursed at completion by an asset based lender introduced by you or by UHY Hacker Young.

5. In the event that:

5.1 all of the replacement and new debt is committed by sources introduced by you; or

5.2 a satisfactory financial restructuring is completed without the commitment of new or replacement debt by a funder other than HSBC,

then no success fees shall be payable, instead an advisory of £25,000 shall be payable upon completion.

6. A retainer of £4,000 per month, either deductible from our success fees or advisory fee or treated as an abort fee if no transaction is concluded, payable initially upon commencement of this agreement and thereafter on the 1^st of each month."

19. Clauses 4 and 5 are therefore the clauses that make success fees referable to the index debt committed. There is no doubt that in the events that happened the necessary "transaction" was completed and that there was "success" though there is a dispute as to what constituted success and "completion", and this dispute falls to be resolved under Issue (1).

The judge's judgment

20. The judge, in a substantial and careful judgment, which approached the issues in a commercial and non-technical way, held that the success fees were under the agreement to be calculated on each of the sums listed in paragraph 14 above. He rejected the argument advanced on behalf of Mr Lewis that success fees should be calculated on funding committed to HG alone, and not to CB. He held that clause 1 of the agreement went far wider than sourcing refinancing for HG alone. He referred to the fact that the agreement contemplated "an insolvency process". He reasoned that the agreement was applicable if HG went into administration, and it was not therefore limited to sourcing refinancing for HG alone. Accordingly the judge concluded that the agreement applied to the funding introduced to CB. There was no need for any further agreement or variation to the agreement. Furthermore (and there is no appeal against this last point ), there was no necessity to imply a term that Bright Asset should be entitled to success fees only if it was the cause, or the effective cause, of the transaction.

General points on the interpretation of the agreement

21. It is well established that the process of interpreting a document must be conducted in the light of the background facts in evidence which were known, or which ought reasonably to have been known, to both parties before the agreement was made. However, there are limits on the extent to which communications or statements by the parties prior to the signing of an agreement can be admitted as evidence on questions of interpretation of that agreement. The court cannot take into account pre-contractual negotiations or evidence as to subjective intention.
22. It is particularly important for the court to have regard to the matrix of admissible fact when construing a commercial agreement as the parties may well have expressed their objectives in an incomplete or imperfect way. It would be rare today for a court to attempt to interpret such an agreement without considering whether there was admissible evidence as to the background to the agreement.
23. As Lord Hoffmann said in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 (in the passage cited by the judge):

"(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent…"

24. The judge found that:

"the actual raising of funds by the Claimant, although a possibility, would not be a requirement for the Claimant to earn a success fee. Mr Gullan proposed to base the quantum of the success fee on the debt funding committed to any transaction by the Defendant and by third parties. Mr Lewis asked Mr Gullan to forward him a draft engagement letter reflecting the discussion." (judgment, paragraph 21)

25. While we have not had full argument on the point, it seems to us that these findings were clearly about pre-contractual negotiations, and thus that they do not constitute evidence admissible on any question as to the interpretation of the agreement.
26. The judge's judgment also contains findings of fact to the effect that, even before the agreement was signed, Mr Gullan discussed with Mr Lewis various ways of securing the exit of HSBC, including its exit via the insolvency of HG and a sale of its business, and that the parties agreed that the success fees would be payable if HSBC took any of the routes which Mr Gullan had put forward in these preliminary discussions for its exit, provided that Mr Lewis was not "forced out" of the business (judgment, paragraphs 19 and 20). Mr Salter submits that the judge's findings as to these discussions are also inadmissible on questions as to the interpretation of the agreement on the grounds that they constitute evidence as to pre-contractual negotiations. Again we did not have full argument on this point. The findings are clearly not admissible if they are relied on as evidence as to any discussion between the parties about the terms to be included in their concluded agreement, but the line between pre-contractual negotiations and admissible background is often difficult to draw. In our judgment, the findings in questions are admissible for the more limited purpose of showing that both knew that one of the options for the exit of HSBC was an insolvency process involving a sale of HG's assets to another person, and that the common aim of the parties was that the role of HSBC as banker to the business should cease but that Mr Lewis should continue to be involved in the management of the business whether it was owned by HG or any successor vehicle. However that may be, we do not need to come to a final view because Mr Salter in any event accepted that it was Mr Lewis' objective that he should "[get] the business as a going concern". Moreover, the evidence about the facts known to both parties in this regard thus amply supports the judge's further holding (if such holding is needed) that the commercial purpose of the agreement was for Bright Asset to provide Mr Lewis with consultancy services in relation to his interests, not the interests of HG. In fact, this is exactly what the preamble to the letter states.
27. Mr Salter informed the court on instructions that there never was any "package" of refinance (a term used in exchanges with the court) proposed to Mr Lewis by Bright Asset. The judge makes no finding that there was a package. But the point does not matter because the real point is that both parties knew that it was an integral part of the refinancing that the business should be saved and that Mr Lewis should have some participation in it, and that this might involve putting HG into some insolvency process and selling off its business,
28. Mr Salter further submits that the court should proceed to interpret the agreement first and then look at the surrounding circumstances. In our judgment, this is not correct approach as appears from the passage cited above from Investors Compensation Scheme Ltd v West Bromwich Building Society. The agreement cannot be abstracted from the admissible factual matrix. The interpretative exercise is the single exercise taking into account the factual matrix.
29. Mr Salter submits that the agreement was drafted by Bright Asset and that it should be interpreted against it in case of doubt. He notes that there were very few positive obligations expressly imposed on Bright Asset by the agreement. However, this principle of interpretation can arise only if the interpretation is sufficiently doubtful. In our judgment there is no such degree of doubt in this case, and so we need not consider this principle further.

Issue (1): whose debt?

30. The submission of Mr Salter is that, on the true interpretation of the agreement, success fees should only be calculated on the sum of £800,000 paid to facilitate the exit of HSBC as the incumbent debt provider. Only monies committed to HG could constitute the index debt committed. The exit of HSBC conferred substantial benefits since it removed the threat that HSBC would enforce its security.
31. Mr Salter seeks support for this submission in the wording of clause 1 and particularly in the description of the consultancy services. The advice was to be "specifically in relation to the full and/or partial repayment and/or exit of the incumbent debt provider". The focus of these words was on the debts of the business and so success fees should be calculated by reference to the replacement or new debt of the business. The references to "new debt" could be explained as debt additional to the debt owed at the time of the agreement to HSBC, but this still does not include indebtedness of a new business. The second sentence did not widen the first sentence because it was limited by its opening words: "in this connection".
32. The corollary of this submission, Mr Salter continues, is that any commitment made to HG or CB after the partial or total exit of HSBC is irrelevant. That would exclude the £2m IDF because that was only completed on 7 February 2007 after the execution of the sale and purchase of assets agreement which took place on 22 January 2007. It is inherently probable on his submission that the parties would have intended completion to be a clear and certain point in time as (under clause 4) it fixed the time for payment of the success fees. The meaning of "transaction" (see clause 6) for this purpose has to be ascertained by the preamble to the letter. There had also to be success in Mr Lewis' terms, viz a rescue of the business and his continued participation, but success was separate from "completion", whose meaning was to be derived from clause 1.
33. By contrast, Miss Rachel Sleeman, who represents Bright Asset on this appeal and who presented her able submissions in an informed and succinct way, contends that the agreement clearly contemplated that the debt might be that of another company like CB and that the £2m IDF taken up by CB has to be included because without it CB would not have been able to carry on the business which it had newly acquired from the administrators of HG. If Mr Salter is right, the commercial objective of Mr Lewis might not be achieved before the success fees became payable. Moreover, on Mr Salter's interpretation of the agreement, the fees could never exceed the existing debt of HG, to which Mr Salter ripostes that the existing debt of HG was substantial enough for this purpose. Moreover, he submits, it has to be borne in mind that CB did not exist when the agreement was entered into and accordingly it was more likely that the reference to replacement and new debt referred to the refinancing of HG itself.
34. In our judgment, the answer to this point of interpretation can primarily be found within the four corners of the agreement itself. Even accepting that the advice was to be specifically in relation to the exit of HSBC, the agreement expressly contemplates that that can be "via an insolvency process". Of course such a process could lead to the survival of HG as a going concern, but, as the term "insolvency process" was unqualified, it did not need to be so limited, and, moreover, it seems to us that such an outcome would probably be unusual. Both parties in fact also knew that it would not necessarily be so limited from their discussions before the agreement was signed. Be that as it may, the agreement clearly contemplated that the exit of HSBC might involve an insolvency process and thus the transfer of the business to another person or company. Added to that, the second sentence of clause 1 expressly provides for Bright Asset to canvass new debt providers. This expression is not limited to the providers of debt to HG. This point is not diminished by the fact, relied on by Mr Salter, that the sentence begins "in this connection". On the contrary, those words are of wide import.
35. Likewise, the first sentence of clause 1 uses the words of advice "in connection with" the debts of the business. The clause goes on to narrow the class of debts "specifically" to those owed to HSBC but that does not remove the width of the prior words "in connection with." Accordingly, the advice was not to be limited to advice to secure the exit of HSBC.
36. There are further indications in the agreement which support this interpretation. As Miss Sleeman points out, if Mr Salter's submission is correct, then the success fees would be payable if HSBC was repaid but the assets of HG were sold to a party unconnected with Mr Lewis. This would not have achieved the objective stated in the preamble to the agreement that HG should deliver advice "in relation to your interests" in HG. In our judgment, it is only by rejecting Mr Salter's submission that any real content can in the context of the agreement be found for the references to "new" debt. The expression was intended to have real content because the final sentence of clause 1 contained a specific and additional provision for Bright Asset to:

"target and canvas new debt providers, facilitate the provision of information and assist you with negotiations."

37. Looking outside the agreement, Mr Lewis had a concern that he should not be "forced out" of the business. This was a fact known to both parties. The expression of this concern underscores that Mr Lewis appreciated that the routes available for HSBC's exit included the possibility of a disposal of the business. The agreement does not place a bar on advice about any such solution.
38. As to the corollary to Mr Salter's argument and the temporal limitation imposed on his submission through the meaning by the term "completion" in clause 4, we consider that under the agreement it is, as Miss Sleeman submits, totally immaterial in what order the various elements of debt are committed. The only requirement is that the debt should be within the overall purpose of the agreement. This would distinguish normal trade debt (on which the success fees were clearly not to be calculated) from debt required as working capital for the business.
39. Our conclusion on this issue means that there is no argument but that success fees must be paid on the loan of £100,000 made by CPL. The issues left to be dealt concern the question whether the £2m IDF and the £800,000 were replacement or new debt for the purposes of clause 4. In that connection, we will need to consider further the meaning of the word "debt" for the purposes of the agreement.

Issue (2): which indebtedness?

Sub-issue (2)(i): the IDF issue

40. Mr Salter's first point is that there is an issue as to whether an IDF is "debt" for the purposes of this agreement. An IDF involves the sale of invoices not a loan of money. Mr Salter submits that the true meaning of the word "debt" is to be found by referring back to clause 1 of the agreement. The reference in clause 1 to HSBC as "the incumbent debt provider" is a reference to HSBC only to the extent that it lent money or provided overdraft facilities. As a practical matter the IDF which HSBC provided might have to be paid off at the same time but that did not affect the meaning of "debt", which was limited to monies lent. Furthermore, the concluding words of clause 4 show that for there to be a debt, money has to be advanced "upfront". That would exclude an IDF such as the £2m IDF under which money is paid only as and when invoices are sold. Bright Asset could not simply assert that the £2m IDF was required to provide working capital to CB because there were no findings to support that. Miss Sleeman rejects each of Mr Salter's points and refers again to the commercial purpose of the agreement.
41. In our judgment, the key to resolving this issue is to recall that the exercise on which we are engaged is to find the meaning of the term "debt" in the context of and for the purposes of the agreement. The fact that it has or may have a much narrower meaning in some other context is nothing to the point.
42. Even apart from the commercial objective of the parties in entering into the agreement, there are at least three indications in the agreement that the term "debt" extended to other forms of funding apart from cash loans. First HSBC was described in clause 1 as the "incumbent debt provider". HSBC's facilities included an IDF of its own. It is wholly artificial to interpret this phrase as referring only to the relationship which HSBC had with HG as a result of its loans. The more natural meaning of this phrase is to include all forms of funding which HSBC extended. This indicates that the parties were using the expression "debt" to include invoice discounting facilities.
43. The next indication in the agreement can be found in clause 4 which in its concluding words excludes from the index debt committed "funds disbursed at completion by an asset based lender introduced by you or by UHY Hacker Young." Mr Salter's interpretation of this exception focuses on the requirement in this exception for funds to be disbursed at completion. But the exception has to be read as a whole and it is equally important in terms of the exception that the lender be introduced by Mr Lewis or UHY Hacker Young. Thus the emphasis on money being provided upfront is diminished. It is not the mere provision of funds on completion that enables the exception to apply; the funds must also have been provided by a lender introduced by Mr Lewis or his advisers.
44. In our judgment, the importance of the exception, read as a whole, is that it makes it clear that some funding at least by way of asset-based lending is included in the term "debt" as used in the agreement and that that term is not limited to loans strictly so called. This is because, if the exception had not been inserted, the expression "debt" would have included the funds expressly excluded by the exception. It is not necessary for us to provide a comprehensive definition of asset-based lending. Mr Salter accepts that it includes hire purchase, and thus it is capable of including transactions which are not lending strictly so called.
45. The question is then whether, if the word "debt" bears a wide meaning in the agreement, including clause 4, its meaning is sufficiently wide to include an IDF. We consider that it is clear, in particular from the use of the term "debt" in the phrase "incumbent debt provider" in clause 1, that it must do so. The natural expectation is that the parties used the term "debt" in clause 4 consistently with its use in clause 1. That is enough for Bright Asset's purposes. However, although this point is not essential to our decision and we do not therefore express a concluded view on it, the terms of the exception in clause 4, especially the words "funds disbursed at completion", are apt to exclude from the index debt committed any purchase price actually paid at completion under an IDF, and this also on one view confirms our interpretation of the term "debt".
46. Finally, it is clear that monies did not have to be provided upfront because of the qualifying word "committed" in clause 4.
47. Mr Salter submits that there is no evidence that the £2m IDF was required by way of working capital for CB. The chronology is important in this: the £2m IDF follows swiftly on the completion of the sale and purchase agreement between the administrators of HG and CB. The agreement for the £2m IDF would have required time to negotiate. Moreover, the administrators are unlikely to have given credit of £800,000 unless they were satisfied that the business was going to be properly capitalised. In the circumstances we consider that this court can fairly draw the conclusion that the £2m IDF was required for working capital purposes.
48. Accordingly we conclude that the £2m IDF represents index debt committed.

Sub-issue (2)(ii): the deferred purchase price issue

49. It follows from the conclusion we have reached about the meaning of "debt", as including funding in general, that funding obtained by asking a creditor to agree to terms for deferred payment is capable of being "debt". Accordingly, but for Mr Salter's next submission to which we turn in the next paragraph, the sum of £800,000, representing the deferred purchase price payable by CB to the administrators of HG, constitutes "new debt" for the purposes of clause 4 of the agreement. There is no requirement in the agreement that there should be a commitment from the other party to extend credit for any particular period of time. In this case, the instalments had to be paid over a period of seven months. That was a short period, but nothing turns on that.
50. Mr Salter's next submission is that the £800,000 should not be included in the index debt committed because it would result in double counting with the £2m IDF. There would have to be a facility to enable the debt of £800,000 to be repaid. Accordingly, one should not count both the debts of £800,000 and CB's new facilities. CB would have to have used its initial invoices and received payment from EFE on them in order to pay the administrators.
51. But, submits Miss Sleeman, there were no findings about how the £800,000 was funded and the court could not assume that the £800,000 was repaid out of financing obtained under the £2m IDF. For instance, some invoices might be outside the agreement (such as those outside the £2m IDF). In any event there was no double counting; there are two tranches of credit, the first to repay the instalments of the purchase price and the second under the £2m IDF. The credit given for £800,000 resulted in an advantage to CB since it accelerated the transfer of stock from HG to CB.
52. We agree with Miss Sleeman. The sum of £800,000, the amount of the deferred purchase price, was credit extended by the administrators of HG to CB and thus funding provided to it. Even when it was discharged, the £2m IDF remained available, thus demonstrating that it was a separate debt. The fact is that there were two items of debt. The first was that extended by the administrators to CB, and the second the amount of the £2m IDF.
53. Accordingly, in our judgment, the sum of £800,000 is debt on which success fee must be calculated.

Disposal of this appeal

54. For the reasons given above, we dismiss the appeal.