England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MRS JUSTICE ROSE
[2014] EWHC 1587 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 November 2017

Lord Justice Patten :

1. In January 2016 I heard and dismissed an application by Onur Air ("Onur") for a variation of the order of Floyd LJ of 11 June 2015 which directed that Onur should pay the sum of £3.64m into court as a condition of continuing its appeal against an order of Rose J made on 22 May 2014. As I explained in my judgment ([2016] EWCA Civ 20), Rose J had ordered Onur to pay the £3.64m plus interest to the claimant, Goldtrail Travel Limited ("Goldtrail"), as compensation for its dishonest assistance in various breaches of fiduciary duty against the company by its former director. Rose J refused permission to appeal but it was granted by Floyd LJ on 15 December 2014. The trial judge had ordered a stay of execution in the event that permission to appeal was granted and, by way of counter to this, Goldtrail sought to make the grant of permission to appeal conditional on the payment of costs which had been ordered (but not yet paid); the provision of security for costs; and the payment into court of the amount of the judgment sum. Floyd LJ had originally acceded to this application on 7 April 2015 on a consideration of the papers but, after an oral hearing, confirmed his original order and directed that the payment in should take place within 28 days: i.e. by 9 July 2015.
2. The application by Goldtrail was motivated by and based on the fact that Onur had by then ceased to operate flights into the UK and therefore had no readily identifiable assets within the jurisdiction which would be available to satisfy the judgment in the event that the appeal were to fail. Onur served no evidence on the application but contended that there was no compelling reason to make the order as required under CPR 52.9(2). It did not argue that it could not pay the money if required to do so or that the requirement to pay the money would stifle the appeal.
3. On 7 July 2015 Onur emailed the Civil Appeals Office asking for an extension of time to 17 July 2015 for the payment in of the judgment debt. The company indicated that it would make a substantial payment into court on 9 July 2015 but needed extra time in which to complete the payment of the £3.64m. This was attributed to an unforeseen delay in the receipt of some $4.837m from Saudi Arabia Airlines which Onur proposed to use to complete the payment in.
4. Floyd LJ was not prepared to grant an extension of time without a formal application supported by evidence from an officer of the company which explained:

"why the payment has not been made, why instructions were given to tell the court that a substantial part payment would be made on 9 July 2015, why that part payment was not made and precisely when and how the order will be complied with if an extension is to be granted."

5. This, as explained in my earlier judgment, was because by then (10 July 2015) the substantial payment promised on 9 July 2015 had not in fact materialised and Onur's Solicitors had said that it would not be made. The evidence in support of the application was contained in a witness statement of 14 July 2015 made by Mr Nedim Gürbüz. He said:

"4. Onur Air had hoped to pay the judgment sum into court from funds to be received on about 6 July from Saudi Arabian Airline, but receipt of that payment was delayed.

5. Onur Air therefore instructed its solicitors on 7 July to apply to the court for an extension of time for payment of the judgment sum until 17 July and to tell the court that a partial payment would be made on 9 July which it then hoped to do to demonstrate to the court Onur Air's intention to comply with the Order.

6. In the event, Onur Air was not in a position to make the Interim Payment on 9 July 2015 and following further consideration of its cashflow position and its commitments to third parties necessary for the business, Onur now seeks permission from the court to pay the judgment sum into court by monthly payments of £500,000. Onur intends to put its solicitors in funds of £640,000 by 15 August 2015 with instructions to send a cheque for the first instalment to be sent immediately to the Court Funds Office. After that Onur will make further payments of £500,000 on the first banking day of each month until the judgment sum has been paid in full. Onur Air acknowledges that if any of these payments is not made then it will be unable to continue with the appeal."

6. Mr Miles QC for Goldtrail submitted that this explanation was materially misleading because it did not disclose that the Saudi Airlines payment of $4.837m had in fact been received by Onur on 7 July 2015 but then used to meet other debts of the company. This was not disclosed until Onur came to make its application under CPR 3.1(7) of 7 December 2015 which I heard in January 2016. In the event, Floyd LJ refused to extend time because he considered that there were grounds for believing that Onur had no intention of complying with his previous orders. He noted that if what was being suggested was that the imposition of the condition would stifle the appeal then the evidence fell far short of establishing that.
7. Onur sought and obtained an oral re-hearing of the application which was fixed for 21 October 2015 but withdrew the application on the morning of the hearing. In a further witness statement of 19 October 2015 Mr Gürbüz again made no suggestion that Onur could not pay or that the condition would stifle the appeal. He simply said:

"Board of Onur Air is of the opinion that this decision is unlawful and against the principles laid down by the European Court of Human Rights. Therefore, the foresaid sum will not be paid."

8. It is common ground that Onur's failure to comply with the condition requiring payment in of the judgment debt did not have the effect of dismissing the appeal. Although not an express term of the order, the result was that the appeal was in effect stayed indefinitely or until further order because Onur could not continue with the appeal unless and until it complied with the condition. It would undoubtedly have been open to Floyd LJ to have made an order on 21 October either striking out or dismissing Onur's appeal but he did not do that. Instead, he said:

"20. I have said enough to indicate that the whole history of this appeal is extremely unsatisfactory. I am however very reluctant to strike out an appeal for which permission has been given without giving to the appellants one final chance of explaining their position. If it is now their position that they are so inhibited by the order for payment of the judgment sum that it is stifling their ability to appeal, then they should say so. I appreciate that is not something which they have so far said. They have had ample opportunity, it might be said, to put forward every argument, but stifling of the appeal is one matter which they have thus far declined to put forward. It may be that they are embarrassed by what was apparently said to Rose J about the fact, as [Mr Hasancebi] said in evidence, that the company was of such a size that £5 million was not a large sum of money. Whatever the reasons for their silence, it seems to me that they ought to come forward with their evidence now.

21. What I therefore propose to do is to dismiss the application for an oral renewal of my order and make an appropriate order for costs in relation to that, but to direct that any application for a final order on the appeal should be made on notice to the appellants and that appropriate opportunity should be given to both sides to file evidence in relation to it. It may be that not much further evidence is required from the respondents. I am very anxious that the appeal should not be disposed of without a proper application on notice for the precise order which the respondents now seek."

9. Goldtrail proceeded to issue an application for an order dismissing the appeal which was met by an application by Onur under CPR 3.1(7) to vary Floyd LJ's order of 11 June 2015 by deleting the condition which required payment in of the judgment debt. Onur based its application on the ground that compliance with the condition would stifle the appeal. In [16] to [24] of my judgment of 21 January 2016 I analysed the evidence which both parties had filed in relation to that issue. Since neither Mr Gibbon nor Mr Miles has criticised the accuracy of that summary, I do not intend to repeat it. It is, I think, common ground that Onur could not continue to trade without the financial support of Mr Bagana who is its chairman and controlling shareholder. The most recent accounts in the evidence (for 2014) indicate that he has lent the company at least $68m secured against its assets which he funded (at least in part) out of dividends received from the company. As I said at [23] of my judgment:

"Mr Bagana therefore appears to have removed equity from the company and to have used the money to establish himself as a secured creditor. His position as the company's largest single (and secured creditor) has put him into the position where he can effectively decide which of the unsecured debts should be paid and when. This is confirmed by Ms Erguven in her second witness statement where she says that:

"I can confirm that Mr Bagana is fully aware of the position that Onur Air finds itself in in relation to the payment of the Judgment Sum into court as a condition of the continuation of the Appeal. He has made it clear that he would only contemplate considering the possibility of advancing further amounts to Onur Air in the most exceptional circumstances if they were commercial payments strictly and immediately necessary in order to keep Onur Air in business due to the already significant indebtedness of the company to him and the deteriorating financial condition of the company. Mr Bagana has made it clear to the management of Onur Air that he believes that if the court were to strike out the appeal on the grounds that he, as a shareholder, had failed to lend money to Onur Air to enable it to pay the Judgment Sum into court, that would be a breach of his and Onur Air's rights under the European Convention of Human Rights."

10. In [25] of my judgment I set out some conclusions based on the evidence:

"Some of the argument has centred on whether the financial information produced by Onur justifies its alleged belief that it is unable to pay the £3.64m and that, to be made to do so, would lead to the stifling of the appeal. Mr Gibbon cautioned me against attempting to second guess the assessment of the financial state and prospects of the company made by its own directors and officers and I am obviously alive to those difficulties. But even taking Ms Erguven's assessment at face value, it is apparent that a decision has been taken that Onur is able to continue to trade with the support of Mr Bagana and that it could, with that financial support, have made the £3.64m payment even if it would have been in difficulties in generating sufficient cash for that purpose from its trading activities. It seems clear to me that Mr Bagana has decided not to fund the payment by the company and if I can take his financial position into account in assessing Onur's ability to satisfy the condition either prior to 9 July 2015 or thereafter then the CPR 3.1(7) application to vary cannot succeed. There is no evidential basis for concluding that the condition could not have been complied with or that, if complied with, it would stifle the appeal."

11. The direction formulated in the last sentence of that paragraph was based on what had been said by Aikens LJ in Société Générale SA v Saad Trading, Contracting and Financial Services Company & Anor [2012] EWCA Civ 695 where the issue was also whether payment in of the judgment sum should be made a condition of the appeal. In short, the test provided by the authorities in considering whether to impose such a condition was whether the company as appellant could afford to make the payment and whether to do so would stifle the appeal. But in considering that issue the court was entitled to take into account the existence of external sources of finance such as from a shareholder or other backer which would enable the condition to be complied with. In relation to that, the test suggested by the authorities was whether any such financial backer could enable the payment to be made. But, as I recognised at the time, that question was not to be answered simply by reference to whether the shareholder or other backer had sufficient means to make the payment. The position of a third party who was under no compulsion or obligation to the appellant company could only be taken into account in what Aikens LJ described as exceptional circumstances which were likely to be where the shareholder had a significant involvement in the running of the company and had habitually funded its trading activities. So I said at [28]-[29] of my judgment:

"28. I do not propose to use this as an occasion for offering guidance as to what might constitute exceptional circumstances for this purpose. This is best developed on a case-by-case basis with reference to specific facts. But I am satisfied that this is a case which falls within that classification. On the evidence, Mr Bagana is the controlling shareholder and chairman of Onur and has put himself into the position where he is its single largest creditor with security for his loans. It is clear that he has a more than usually close relationship with the company (witness the guarantee arrangements I have mentioned) and effectively controls its financial affairs. I can see no material differences between his situation and that considered by Aikens LJ in Société Générale.

29. In these circumstances, the application fails on its merits. Onur has not established that it could not have satisfied the condition by 9 July or at some later point and the allegation that the appeal would be stifled is not made out. It is not therefore necessary for me to consider Miss Stonefrost's other submission which is that I have no jurisdiction to make an order under CPR 3.1(7) in this case because there was no material change of circumstances between 11 June and 9 July 2015."

12. Onur appealed successfully to the Supreme Court against my order dismissing their appeal. The issue on the appeal was whether the decision of the Court of Appeal on which I based my judgment correctly stated the test to be applied for the imposition of a condition under CPR 52.9 in circumstances where the appellant company's ability to make a payment in depended upon it receiving financial support from a third party such as Mr Bagana. The Supreme Court rejected as appropriate a test based on exceptional circumstances and emphasised that the question in every case remained whether the company could make the payment. Insofar as the company was financially dependent on third party support, the correct inquiry was not whether the third party could provide the necessary finance, but whether he would do so in the particular case.
13. The Court accepted that the burden rested on the appellant to demonstrate that the imposition of the condition would stifle its appeal. Lord Wilson JSC said:

"15. There is no doubt - indeed it is agreed - that, if the proposed condition is otherwise appropriate, the objection that it would stifle the continuation of the appeal represents a contention which needs to be established by the appellant and indeed, although it is hypothetical, to be established on the balance of probabilities: for the respondent to the appeal can hardly be expected to establish matters relating to the reality of the appellant's financial situation of which he probably knows little."

14. In relation to third party support, he said:

"18. It seems that, in particular and as exemplified by the present case, difficult issues have surrounded the ability of a corporate appellant, without apparent assets of its own, to raise money from its controlling shareholder (or some other person closely associated with it); and this is the context of what follows. When, in response to the claim of a corporate appellant that a condition would stifle its appeal, the respondent suggests that the appellant can raise money from its controlling shareholder, the court needs to be cautious. The shareholder's distinct legal personality (which has always to be respected save where he has sought to abuse the distinction: Prest v Prest [2013] UKSC 34, [2013] 2 AC 415, 487, para 34) must remain in the forefront of its analysis. The question should never be: can the shareholder raise the money? The question should always be: can the company raise the money?"

15. In commenting on the decision in Société Générale, he went on:

"23. … Possibly ham-strung by the doctrine of precedent, the court in the Société Générale case evidently considered it best to treat the first additional observation in the Hammond Suddard case by consigning it to that over-used store-room in the mansion of the law which is designated as "exceptional circumstances". Such a criterion is on any view dangerous because it is not, on the face of it, linked to its context: see Norris v Government of United States of America (No 2) [2010] UKSC 9, [2010] 2 AC 487, para 56. It sets a "snare … for it may lead to the wrongful downgrading of the significance of circumstances just because they happen not to be exceptional or to their wrongful upgrading just because they happen to be exceptional": H (H) v Deputy Prosecutor of the Italian Republic, Genoa (Official Solicitor intervening) [2012] UKSC 25, [2013] 1 AC 338, para 161. Having, however, an unconstrained ability to reject the phraseology of the additional observations, we in this court have no need to approve the superimposition upon the relevant criterion of a test of exceptional circumstances which neither party before the court seeks to defend. In this context the criterion is:

"Has the appellant company established on the balance of probabilities that no such funds would be made available to it, whether by its owner or by some other closely associated person, as would enable it to satisfy the requested condition?"

24. The criterion is simple. Its application is likely to be far from simple. The considerable forensic disadvantage suffered by an appellant which is required, as a condition of the appeal, to pay the judgment sum (or even just part of it) into court is likely to lead the company to dispute its imposition tooth and nail. The company may even have resolved that, were the condition to be imposed, it would, even if able to satisfy it, prefer to breach it and to suffer the dismissal of the appeal than to satisfy it and to continue the appeal. In cases, therefore, in which the respondent to the appeal suggests that the necessary funds would be made available to the company by, say, its owner, the court can expect to receive an emphatic refutation of the suggestion both by the company and, perhaps in particular, by the owner. The court should therefore not take the refutation at face value. It should judge the probable availability of the funds by reference to the underlying realities of the company's financial position; and by reference to all aspects of its relationship with its owner, including, obviously, the extent to which he is directing (and has directed) its affairs and is supporting (and has supported) it in financial terms."

16. The Court then had to consider whether I had applied the correct test and, if not, whether I would have reached a different conclusion. Differing views were expressed about this but, by a majority, it was decided to set aside my order and to remit the applications back to me to be re-considered in the light of the judgment of the Supreme Court. In these circumstances, it would be neither useful nor appropriate for me to analyse further my earlier decision. As I accepted in that judgment, the test was whether or not Onur could make the payment without stifling its appeal and the only issue now is to determine whether Mr Bagana will provide the financial support that is necessary.
17. There is no serious suggestion that Mr Bagana could not afford to provide the necessary financial support if he chooses to do so. To that extent, I repeat the findings which I made in my earlier judgment. Mr Miles drew my attention to the history of these applications which I have already set out and to the fact that at no time up to 21 October 2015 did Onur suggest in its evidence that it was not going to make the payment or that the condition would stifle its appeal. The reason given by the board of Onur for not complying with the order of 11 June was a legal one based on what I assume is Article 6 of the European Convention on Human Rights. It was not said even then that it could not pay.
18. Ms Erguven in her later evidence has explained about Onur's cash flow difficulties and the increase in Onur's current liabilities. But, as she accepts in her evidence, the airline has continued to trade and presumably to meet its trade debts, albeit with Mr Bagana's financial support.
19. Mr Miles says that the board of Onur could in fact have met the payment in by using the monies received from Saudi Arabian Airlines on 7 July and leaving Mr Bagana to fund any shortfall which that would have created in relation to the company's other trade debts. Although that is an unlikely scenario to have occurred given that Mr Bagana is the chairman of the board and controlling shareholder, it is, I think, fair to say that there was certainly cash available at the relevant time and that had Mr Bagana opted to make good any cash flow deficit then the payment in could have been made byOnur. But, in the end, one comes back to the same question of whether that would have occurred.
20. The Supreme Court focused its statement of the law by reference to the usual circumstances in which this issue is likely to arise: namely at the hearing of an application under CPR 52.9 to impose the condition for payment in either when giving permission to appeal or thereafter. In such cases the focus in relation to any allegation of stifling is necessarily prospective: will the imposition of the condition stifle the appeal in the future and will the company be able to make the payment with the support of any third party finance available to it? In the present case, that issue has arisen in the context of an application by Onur to vary an earlier order by removing the condition and the question has arisen as to the date at which the relevant question should be asked and answered.
21. It is, I think, agreed that although the order of 11 June imposed a deadline of 9 July for the payment in, Floyd LJ clearly envisaged in his judgment on 21 October that it was not too late for Onur to seek to comply with the condition out of time and, so far as necessary, to make an application for an extension of time for that purpose. The failure to make the payment by 9 July triggered the stay but it was not an unless order which would require Onur to have made an application for relief from sanctions with all the difficulties which that might involve following the decision of the Court of Appeal in Andrew Mitchell MP v News Group Newspapers Ltd [2013] EWCA Civ 1537. The question as to whether Onur can satisfy the condition therefore falls to be determined as of now as part of these applications and not by reference to the 9 July or some earlier date.
22. Even on that basis Mr Gibbon submits that the answer to the question whether Mr Bagana will provide the necessary financial support so that Onur can meet the payment in is readily answerable simply by a consideration of what has in fact happened thus far. The fact is, he says, that Mr Bagana has not provided the support whether because he believes that it would infringe his or the rights of Onur under the Convention or for some other reason. There is nothing to suggest that he will change his mind.
23. In my judgment it would be wrong to regard what has happened up to now as conclusive of whether Onur can make the payment in with Mr Bagana's support. As Mr Miles emphasised, echoing what was said in all of the judgments in the Supreme Court, there is no direct evidence from Mr Bagana at all and the reasons given for refusing to make the payment in are not tenable. Mr Bagana has made a very substantial investment in this company and it is unrealistic to suppose that he will put that investment at risk by allowing the appeal to be dismissed for want of a sum which, on the evidence, he can easily pay resulting in an enforceable judgment and possibly the liquidation of the company. Ms Erguven's evidence is that Mr Bagana will only make further advances to Onur in the most exceptional circumstances and if they are commercial payments necessary to keep the company in business. But if Onur's financial position remains (as I assume it does) the same as described in her evidence then there is a need for continuous funding by Mr Bagana on that basis and I do not understand why the payment of the £3.64m does not fall into the same category. I am also entitled, I think, to take into account the fact that no allegation of stifling was ever made until very late in the day when Onur was threatened with an order dismissing its appeal. The burden is fairly and squarely on Onur to satisfy the Court that the retention of the condition will stifle the appeal and I am not persuaded that it has done so. I think that Mr Miles may well be right to say that, looked at against the whole history of this matter, this is an exercise in delay brinkmanship by Onur but in any event they have not discharged the burden which the Supreme Court has confirmed rests upon them in this case.
24. I propose therefore to dismiss Onur's CPR 3.1(7) application. It is not necessary in the circumstances to deal with Goldtrail's alternative submission that there has been no material change of circumstances. It also follows for the reasons which I gave in my earlier judgment that the appeal will be dismissed.
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