England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/11/2006

Mr. Justice Evans-Lombe :

1. By letter dated the 20^th August 2002 Clydesdale Bank PLC ("the Bank"), the Third Defendant to these proceedings demanded payment of the sum of £847,452.93 from the Bank's customer Brampton Manor (Leisure) Ltd ("Leisure"), the Claimant. The demand was addressed to the directors of Leisure of whom Mr Woolf was Chairman and who was also Leisure's controlling shareholder. The demand was made pursuant to schedule 2 part 1 sub-paragraph 1 of a Loan Master Agreement dated the 12^th December 2000 which governed the relationship between the Bank as loan creditor and Leisure as debtor at the date of the demand. Schedule 2 part 1 set out "events of default" entitling the Bank to "demand repayment of all loans together with accrued interest and all other sums payable under the Loan documents if any of the events referred to in schedule 2 occurs", see clause 10.1. "Loan documents" in clause 10.1 are defined in schedule 1 as meaning "this agreement, each offer letter, each notice given by you to us in accordance with the offer letter, each confirmation, any security you or a guarantor give as set out in the [facility letter] any notice given under this agreement and any other document specified by us as a "loan document". Paragraph 1 of part 1 of schedule 2 provides as an event of default:-

"1. If you fail to pay us any sum of money or fail to discharge any liability which you may now or at any time in the future owe us when it is due."

2. Further relevant events of default in part 1 of schedule 2 are:-

"3. If you are in default in respect of any of your other financial arrangements with us…

11. If you cease to carry on all or a material part of your business.

12. If any event occurs which restricts the continuing nature of or any reduction occurs in the value to us of any guarantee or security which we hold for the facility.

13. If any event occurs which would affect you or your business so as to render you unable to comply fully with your obligations to us pursuant to this agreement and any other document entered into pursuant to this agreement.

14. If any event occurs which, in our opinion, could have a material adverse effect on your financial condition…"

3. As at the 20^th August 2002 part of Leisure's indebtedness to the Bank consisted of amounts due under a Term Loan Agreement by which the Bank lent to Leisure £500,000. The Term Loan Agreement was repayable with interest by monthly instalments. Leisure was, on the face of its accounts with the Bank in default in payment of the July and August instalments the latter becoming due on the 13^th August in the total sum of £20,769.86. The Bank had also lent to Leisure £360,000 on terms as to payment of interest. At the same time Leisure had the benefit of an overdraft facility with the Bank with a limit of £10,000, repayable on demand which the Bank had offered but which Leisure had not accepted although it had made use of the facility. As at the date of demand Leisure was indebted to the Bank in the sum of £1,742.03 on current account repayable on demand.
4. On the 30^th August 2002 Mr Allison for the Bank wrote to the directors of Leisure and having referred to the Bank's demand continued:-

"The sum required to repay the irregular current account balance and allow the two outstanding payments on the Treasury Loans to be made is £24,488.15 as detailed below. The Bank requires that the sum of £24,488.15 is received in your current account by 3 p.m. on Monday 2^nd September 2002 to cover these arrears.

Thereafter the Bank requires that the current account operates in credit at all times and any items not covered by cleared funds will be returned unpaid. Sufficient cleared funds will therefore require to be available by the 13^th of each month to allow the loan payments to be maintained. The Bank also requires to be satisfied that all Covenants within the Bank's lending documentation continue to be met now and on an ongoing basis.

This letter is without prejudice to the formal demand letter and should you fail to lodge these funds as detailed above the Bank will require to take such further action as it considers appropriate to protect its position and this may include the appointment of administrative receivers to [Leisure]."

5. Leisure failed to make the payments specified in the Bank's letter of the 30^th August by the 2^nd of September and, accordingly, on the 6^th September 2002 the Bank appointed the first and second Defendants (together "the receivers") as administrative receivers pursuant to the Debenture granted by Leisure to the Bank on the 6^th August 1998.
6. By Clause 2.1 of the Debenture Leisure had covenanted to pay to the Bank "all monies and liabilities which now are or shall at any time hereafter be due and owing or incurred to the Bank" by Leisure. By the charging clause at clause 3 of the Debenture Leisure charged its assets by way of fixed and floating charge to the Bank as a continuing security to secure "the Secured Amounts". By clause 1.1 "the Secured Amounts" meant the monies and liabilities which Leisure covenanted by clause 2 to pay to the Bank. By clause 4 of the Debenture Leisure covenanted to the Bank "not without the prior written consent of the Bank" to:-

"4.1.3 Part with sell or dispose of except in the ordinary course of [Leisure's] business and for the purpose of carrying on the same any of the Charged Assets… ".

7. By clause 4.10 Leisure covenanted "not without the prior consent of the Bank [to] grant or agree to grant any licence or tenancy affecting all or any part of the Charged Assets nor exercise the powers of leasing or agreeing to lease or accepting or agreeing to accept surrenders conferred by sections 99 or 100 of the Law of Property Act 1925." "The Charged Assets" are defined at clause 1.1 as "the property assets and undertaking for the time being of the Mortgagor [Leisure] which are subject to the charges contained in this Debenture other than the Charged Debts and references to the Charged Assets shall include reference to all or any of them." "The Charged Debts" are defined by clause 1.1 as "all book debts and other debts now and from time to time hereafter due owing or incurred to the Mortgagor other than such of the said debts as the Bank may have specifically agreed in writing to exclude from the first fixed charge contained in clause 3.2.8". The Charged Debts are subject to a fixed charge created by clause 3.2 and, to the extent excluded by the Bank, would fall within the floating charge created by clause 3.3. Finally by clause 4.2.1 Leisure covenanted with the Bank "to get in and realise the Charged Debts in the ordinary course of its business (which shall not include or extend to the selling or assigning or in any other way factoring or discounting the same) and hold the proceeds of such getting in and realisation of the Charged Debts upon trust for the Bank…" and by clause 4.13 "to procure that no person shall become entitled to assert any proprietary or other like right or interest over the Charged Assets without the prior written consent of the Bank."
8. Clause 7 of the Debenture sets out "Events of Default" upon the occurrence of which "the Bank shall cease to be under any further commitment to the Mortgagor and the secured amounts not otherwise payable on demand shall become payable on demand". Materially to this judgment these are:-

"7.1 If any of the Secured Amounts shall not be paid or discharged when due or

7.2 If the Mortgagor shall be in breach of any of the obligations binding on the Mortgagor under this Debenture (other than the obligation to pay or discharge when due any of the Secured Amounts) and such breach (if capable of remedy) has not been remedied to the satisfaction of the Bank before the expiry of seven days after notice calling upon the Mortgagor to do so has been given by the Bank or…

7.7 If the Mortgagor sells transfers or otherwise disposes of, whether by a single transaction or a number of transactions the whole or any part of the Charged Assets and/or the Charged Debts without the Bank's prior written consent provided that the Mortgagor may part with or dispose of any assets which are for the time being subject to the floating charge herein contained for full consideration and in the course of the Mortgagor's trade…"

9. Clause 9.1 provides that:-

"9.1 At any time after it has demanded payment in respect of the Secured Amounts … the Bank may appoint in writing one or more persons to be the Receiver of the Charged Assets…

9.3 The Receiver shall be the agent of the Mortgagor and the Mortgagor alone shall be responsible for his acts…

9.5 The Receiver shall have full power at his absolute discretion:-

9.5.1 To take possession of and collect and get in all or any part of the Charged Assets or the Charged Debts… "

The Issues

10. In these proceedings Leisure, through Mr Woolf, contends that the appointment of the receivers on the 6^th of September 2002 was unlawful and seeks an order for their removal, a discharge of the receivership and consequential relief. The issues in the case are whether, as Leisure contends, at the time of the demand on the 20^th August 2002 Leisure was truly in default. It is accepted that on the face of the accounts there was no money, or insufficient money, held by the Bank to the credit of Leisure, sufficient to pay the July and August instalments due under the Term Loan Agreement. Leisure contends, however, that by reason of the conduct of the Bank, extending back to September 1998, the commencement of the Bank's banking relationship with Leisure, and continuing till the demand and which resulted in unlawful deductions from Leisure's accounts by the Bank, the Bank brought about a situation whereby Leisure did not have sufficient credit in its accounts to make the instalment payments. In order to determine whether Leisure's complaints are justified it will be necessary to review the history of Leisure's relationship with the Bank from its inception and to deal in detail with the various complaints which Mr Woolf makes on Leisure's behalf.
11. There is a further issue which is raised by paragraph 46A of the further amended defence of the Bank. On the 26^th February 2004 Chief Master Weingarten dismissed the Bank's application for summary judgment based on the contention that, on the established facts of the case, it was not reasonably arguable that the Bank's actions were the cause of Leisure not being in a position to pay the instalments. Paragraph 46A of the Bank's defence was inserted by further amendment on the 11^th September 2006. It is based on the principle that a debenture holder may rely on any circumstance, existing at the time of the appointment of receivers, which would justify their appointment notwithstanding that it was not being expressly relied on by the debenture holder at the time the appointment was made, see Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232 per Lord Justice Nicholls at page 249. Paragraph 46A of the Bank's further amended defence reads as follows:-

"46A. If, which is denied, the Bank was not entitled to issue the demand on 20 August 2002 by reason of the Company's default in payment of loan and interest instalments to its loan account, it was entitled to issue the demand for the following alternative reasons.

(1) the Company's draft statutory accounts for the year ended 31 December 2001, as sent to the Bank by the Company on 25 July 2002, purported to record that the Company had made a profit on sale of assets of £116,285. No such sale of assets had taken place in that year at an earlier or later time with the Bank's prior consent whether written or otherwise. In the premises, the said sale was a breach of clauses 4.1.3, 3.13, 7.2 and 7.7 of the Debenture and an event of default under the Loan Master Agreement, Schedule2, Part 1, paragraph 1, 3, 12 and 14.

(2) Further, from about 18 July 2002, by causing day to day transactions to be carried out in the name of Fitness and payments in respect of such transactions to be received into the A&L Account, the Company ceased to collect the Charged Debts in the ordinary course of its business and/or ceased to carry on a material part of its business. That was a breach of clauses 4.2.1 and 7.2 of the Debenture and/or an event of default under the Loan Master Agreement, Schedule 2, Part 1, paragraphs 3, 11,12,13 and 14."

Background facts

12. Leisure was formed in early 1998 for the purpose of acquiring the leisure centre business of Brampton Manor Ltd. That company was owned and controlled by Mr Woolf and was one of a group of companies funded by loans from Barclays Bank secured by a debenture over what were subsequently Leisure's club premises. Those premises and the business conducted at them were acquired by Leisure from an administrative receiver appointed by Barclays to enforce their security. The purchase by Leisure was funded by a loan from the National Westminster Bank. Within a few months Mr Woolf was looking for a replacement financier. He was introduced to the Bank's Newcastle Business centre by Leisure's auditors. In due course the Bank agreed to advance to Leisure £850,000 which was used to discharge Leisure's indebtedness to the National Westminster Bank. Part of Leisure's arrangements with the National Westminster Bank was an interest rate collar agreement which fixed the interest rate on the first £500,000 for four years at 6.2%.
13. The first matter in issue which is capable of affecting the balance of account between the parties arises from an interest swap agreement in relation to the first £500,000 of the loan which the Bank allege was entered into between the Bank and Leisure as a result of a telephone conversation on the 1^st September 1998 between Mr Woolf and Mrs Pamela Thornton who was at the material time a Treasury manager of the Bank based in Newcastle. I will refer to this alleged agreement as "the September 1998 Loan Agreement". It is Leisure's contention that no concluded agreement was made at this time for an interest rate swap and that deductions made from Leisure's current account as a result of the operation of the terms of that agreement were unlawfully made, with the consequence that Leisure's account should be treated as re-credited with the amount of those deductions as at the date of the demand, the 20^th August 2002.
14. It is apparent that, in the weeks following the 1^st September, money market rates of interest declined sharply so that any swap agreement, on the terms which the Bank contends were concluded with Leisure, worked to its substantial disadvantage. By letter dated 24^th November 1998 from Mr Woolf to Mr Lenney, the Bank's relationship manager dealing with Leisure, Mr Woolf questioned whether Leisure was bound by the terms of the swap agreement which Mr Woolf contended had never been agreed to by the signing of a confirmatory document on behalf of Leisure. It appears that after some dispute it was agreed that Leisure's loans from the Bank should be reorganised. The terms of the reorganisation are set out in a letter dated the 23^rd March 1999 from the Bank, by Mr Lenney, to Mr Woolf, to be completed at a meeting on the 25^th March.
15. The amount of the loan was again to be £850,000 (in effect increasing the total advance when previous repayments are taken into account). The basic interest rate was reduced so as to be 1.85% over LIBOR (as opposed to 2.25% previously). The period of the loan was increased to ten years and a new interest rate collar agreement was to be entered into in respect of £500,000 of the advance ("the Term Loan"). I will refer to this agreement as "the March 99 Loan Agreement". It is the subject of the second issue between the parties. Leisure again contends that it is not bound by the terms of this agreement suggested by the Bank with the consequence that deductions made under it by the Bank resulting from the operation of the collar terms contained in it were not lawfully made.
16. Nonetheless it seems that the Bank operated the terms of the March 99 Loan Agreement thereafter and Mr Woolf did not, for some time object. The arrangements between the Bank and Leisure permitted the quarterly instalments becoming due under the term loan agreement to be paid by the Bank debiting Leisure's current account and crediting the term loan account without recourse to Leisure. In May 2000 it was discovered that owing to an error the Bank had omitted to make the necessary intra account transfers to pay three of the instalments but Leisure had utilised the resulting credit so that there was insufficient credit on its accounts to pay those instalments forthwith. An arrangement was arrived at by which the amount of the missing instalments was added back to the amount advanced. This arrangement is recorded in a facility letter dated the 8^th May 2000 recording a replacement Loan Agreement signed by Mr Woolf on behalf of Leisure. I will refer to this agreement as the "May 2000 Loan Agreement". Save as to the amount lent the terms of this agreement do not differ from those of the March 99 Loan Agreement.
17. Thereafter the terms of the May 2000 Loan Agreement were operated by the Bank in respect of the balance of the advance, thus augmented, until November 2000. It appears that, save as to the first instalment period when the operation of the collar provisions permitted the Bank to debit Leisure with the sum of £417, LIBOR remained between the upper and lower limits of the collar provisions so that the Bank did not apply any further consequential debits to Leisure's current account.
18. A long standing servant of Leisure who became, in effect, its finance director was a Mr Trevor Marples. In July 2000 Mr Marples came under suspicion for having defrauded Leisure of substantial sums in an attempt to support an ailing public house in Chesterfield which belonged to him. An investigation followed by Leisure's accountants and the police. Mr Marples was arrested and charged but, for reasons which were never made clear in the course of the hearing, those charges do not seem to have been pressed so that he never came to trial. In the course of the investigation it was discovered that the Bank, in breach of its mandate, had permitted payment of a number of cheques carrying only the signature of Mr Marples. It seems that the vast majority of these cheques were in payment of legitimate creditors of Leisure. However it was and remains Mr Woolf's contention that the single signature cheque payments were used as a means of abstracting cash from Leisure by simultaneously drawing cash as if in payment of the payees of those cheques.
19. Mr Woolf held the Bank partly responsible for the losses suffered by Leisure. By an agreement in writing dated the 20^th October 2000 ("the October 2000 Settlement Agreement") the Bank agreed to pay Leisure £90,000 "in full and final settlement of all outstanding and future claims that it or any associated companies may have against [the Bank] in respect of all defalcations and/or fraudulent activities of Trevor Marples whilst in the employment of [Leisure] or thereafter." By clause 2 of the agreement this payment was expressed to be without admission of liability by the Bank. By clause 3 of the agreement the parties agreed to "provide full cooperation to the police in their investigations" and to assist each other in any civil proceedings brought by either against Mr Marples. £90,000 was credited by the Bank to Leisure's current account on the 8^th November 2000.
20. Because of Leisure's poor trading performance, as a result, it was suggested, of the effect of Mr Marple's alleged defalcations, it again became necessary to reorganise the Bank's loans to Leisure. Accordingly a series of documents each bearing the date 23^rd November 2000 were apparently entered into by the Bank and Leisure, namely, a general loan facility letter making available a total facility of £860,000 for a period of ten years, an offer letter providing for an interest collar agreement with monthly interest periods, a further offer letter containing terms for an interest swap agreement in respect of the balance of the loan of £360,000, interest being calculated monthly, and a loan master agreement carrying a date 12^th December 2000. I will refer to these arrangements as "the November 2000 Loan Agreement". Save as to the period of the loan, its extended amount, and the terms of the swap agreement in respect of the amount of £360,000, advanced in addition to the £500,000 term loan, the terms of the November 2000 Loan Agreement were the same as those which governed the March 99 Loan Agreement as enlarged in May 2000.
21. The documents comprising the November 2000 Loan Agreement were signed on behalf of Leisure by Mr Woolf but in doing so he added the words "subject to our letter dated the 8^th December 2000" as qualifying Leisure's acceptance of the terms contained in them. These words refer to a letter of that date to Mr Harvey of the Bank. The effect of this endorsement is the subject of the third issue between the parties. That letter, so far as material reads as follows:-

"I had a conversation with Will yesterday in which he suggested that I amend the Contracts for the new loan. I was concerned that not being a lawyer I might not do this properly so I have simply made the Contracts subject to the contents of this letter and I incorporate herein the matters we have agreed with Clydesdale. These are:-

1. That the terms & conditions of the new loan are no more onerous than that of the old loan. If in the event that a difference arises, then the terms and conditions of the old loan will take precedence. In particular my personal guarantee is limited to £100,000… "

22. It is Leisure's contention that it is not bound by the terms of the interest swap agreement covering £360,000 of the advance because they differ from those of the May 2000 Loan Agreement and that, accordingly, deductions representing the operation of that interest swap agreement have been unlawfully made from Leisure's current account. It has been agreed that, if Leisure's contentions are accepted, it has overpaid interest in the sum of £15,563.
23. In 1998 and 1999, on the advice of its accountants, Leisure had operated a VAT avoidance scheme pursuant to which an associated company, Brampton Manor Health & Fitness Club Ltd ("Fitness"), also owned and controlled by Mr Woolf, was presented as the entity which actually provided the Leisure facilities and other services to members of the public who joined the club. It was Mr Woolf's contention and his evidence, that all members of the club contracted with Fitness on joining and, in doing so, many completed a standing order apparently in favour of Fitness for their subscriptions an example of which was in evidence. Collection of members subscriptions was made through the BACS system and it appears that the BACS number appearing on the membership application forms in the name of Fitness was Leisure's number. It was Mr Woolf's evidence that 55% of the total turnover of the club represented members subscriptions payable to Fitness. Accounts for Fitness for the years 1998 and 1999 were in evidence which showed a receipt of money by Fitness balanced by payments out to Leisure of management fees and rent and other charges in respect of use of Leisure's premises and facilities. The intended result was that Fitness made no profit for these years. Apparently this was a result required by the avoidance scheme with the result, it was suggested, that Fitness was not bound to account for VAT on membership subscriptions. I was told that this scheme was, at the time, being employed throughout the country by clubs offering similar services to those offered by Leisure and Fitness.
24. It appears, however, that, with effect from the 1^st January 2000 the loophole in the VAT system exploited by this scheme was closed by legislation and I was told by Mr Woolf that VAT was paid on subscriptions during the year 2000. However Leisure's accountants proposed a more sophisticated version of the avoidance scheme which it was suggested would circumvent the new legislation and again make it possible for members subscriptions to be paid free of VAT. In pursuance of this new scheme the following transactions were entered into by Leisure, Fitness and Funday Developments Ltd ("Funday") a company similarly owned and controlled by Mr Woolf:-

i) A lease dated 31^st December 2000 whereby Leisure leased its premises at Brampton Manor to Funday for a period of 51 years at a premium of £900,000 and at a peppercorn rent.

ii) An agreement dated the 1^st January 2001 for the sale by Leisure to Funday of Leisure's business for a consideration of £200,000.

iii) An agreement dated the 1^st January 2001 whereby Leisure agreed to lend to Funday £1.1M such loan to be made "by means of intercompany account on the 1^st January 2001 to be repaid on a date to be agreed at simple interest of 2% over Royal Bank of Scotland base rate".

iv) An assignment dated the 1^st February 2001 of the lease comprised in i) above by Funday to Fitness in consideration of £1 and covenants to be entered into by Fitness in favour of Funday.

v) An agreement dated the 1^st February 2001 for the sale by Funday of its business of the provision of sporting leisure and associated facilities to Fitness for a consideration of £1.15M.

vi) An agreement for a loan by Leisure to Fitness of £1.15m "for the purpose of securing a lease of Brampton Manor premises", to be made available "by means of intercompany account on the 1^st February 2001 at an interest rate of 2% over Royal Bank of Scotland base rate".

vii) An "operational agreement" between Leisure and Fitness involving Leisure employing the staff required to administer the club and Fitness recouping to Leisure the costs of employment.

25. For the purpose of this judgment the important transactions are the dispositions by Leisure at i) ii) iii) and vi). I will refer to these transactions as "the 2001 VAT Scheme Dispositions". Each of the documents which I have set out above was signed on behalf of the parties to them by Mr Woolf. It appears that, whereas at one stage it was being suggested that these transactions were being entered into with the knowledge and consent of the Bank, Mr Woolf now accepts that that was never the case. The full extent of these documents has only come to light as a result of disclosure in these proceedings. It was Mr Woolf's evidence that the arrangements described in these documents were only to be effective once clearance had been obtained from the Customs that they would be effective to relieve members subscriptions from VAT. He said that in the event that no such clearance was available he would simply "tear up the documents". Notwithstanding this evidence, and jumping ahead to the days immediately after the appointment of the receivers, Mr Woolf in his evidence accepted that he showed the lease of the Brampton Manor premises, and assigned by Funday to Fitness, to the Receivers when they attempted to take possession of those premises in order to convince them that they were not entitled to possession.
26. In the result the Receivers commenced proceedings in the Leeds District Registry of this court against, amongst others, Mr and Mrs Woolf and Fitness for the purpose, amongst others, of obtaining possession of the Brampton Manor premises. As the case was pleaded by the Receivers' possession was sought on the basis that the lease and the sale of the business to Funday and then on to Fitness were sham transactions. The Receivers' claim was initially defended but when the matter came for hearing before Judge Langan QC, sitting as a deputy judge of this court, the defence was dropped and by consent he declared that "the lease purportedly granted by [Leisure] to [Funday] on the 31^st December 2000… is not binding on Leisure", that Fitness had no enforceable leasehold interest in the Brampton Manor premises and neither Fitness nor Funday had any interest in the business or assets of Leisure as a result of the sale agreement of the 1st January 2001. The judge made an order for possession of the premises forthwith.
27. Meanwhile, following the execution of the loan documents comprising the November 2000 Loan Agreement , and notwithstanding that those documents had been signed by Mr Woolf subject to an endorsement, the Bank complied with the terms of the new loan arrangements and the enlarged advances were made to Leisure. In addition overdraft facilities up to a limit of £55,000 were made available by the Bank. However notwithstanding inflows of cash to Leisure from Mr Woolf and sources available to him, Leisure's financial position did not improve. Mr Woolf started to adopt the position that the Bank was under some form of obligation, in addition to crediting Leisure with £90,000 in pursuance of the October 2000 Settlement Agreement, to make available such loan and overdraft facilities as would carry Leisure through the financial crisis allegedly brought about by the fraud of Mr Marples. These demands reached a head in July 2001 when Mr Woolf declined to accept an extension of the overdraft limit of £55,000 which the Bank had made available, on the ground that any such advance was repayable on demand.
28. Since May 1999 the management of Leisure's accounts with the Bank had been under the supervision of the Bank's Asset Restructuring Department because Leisure was regarded as potentially a problem customer. Leisure was categorised as a customer whose affairs that department should treat as being for "retention" but also "on watch". As a result of the events of July 2001 the decision was taken by the Bank, to transfer Leisure's account from "retention" to "exit". On the 14^th August 2001 with the overdraft now at almost £90,000 and no formal overdraft facility in place, the Bank wrote to Leisure requiring an immediate lodgement of funds to bring the account back within the expired £55,000 facility and Leisure's proposals for repayment of the overdraft in full. This letter prompted the first of many letters of complaint by Mr Woolf to the Bank's Chief Executive. Nonetheless he was able to channel funds from his private sources into Leisure sufficient to bring Leisure's account into credit on the 18^th September 2001. There followed discussion in the Bank's Asset Restructuring Department as to the form in which the Bank should "exit" its relationship with Leisure. By mid 2002 it had been concluded that the appropriate strategy was to leave Leisure in a "dry loan" situation, that is, leaving Leisure with its term loans repayable in accordance with the agreed terms but with no overdraft facilities so that Leisure's current account would have to be operated on a credit basis only.
29. The later months of 2001 and the first half of 2002 were filled with complaints by Mr Woolf to various officials of the Bank and its Chairman and to the Banking Ombudsman complaining about the Bank's conduct of Leisure's accounts which it is not necessary to describe in detail. These complaints included complaints about unjustified deductions from Leisure's current account and complaints about the Bank's failure to support Leisure to enable it to trade out from the financial difficulties allegedly brought about by Mr Marples fraud. On the 30^th May 2002 Mr Woolf wrote to the Bank asking for "a schedule of all debits made to our account without our approval, since your commencement as our bankers." The letter continues:-

"Clearly the schedule should not include normal loan repayments, interest on normal loans, and insurance payments. It should include all sums related to the collar arrangements, all penal charges, the Conrad Ritblatt monies [to which I will return] the costs of setting up loans (save for the initial loan agreement) and all interest excess and other charges related to overdrafts."

30. On the 17^th June 2002 proceedings were issued in this court by Mr Woolf and Leisure against the Bank. Leisure's claims in those proceedings were for all, alternatively half of the losses allegedly suffered by Leisure as a result of Mr Marples' fraud and damages for breach of contract. These proceedings were ultimately struck out as disclosing no cause of action by order of Master Price made on the 4^th February 2003.
31. Meanwhile in June 2002 Leisure defaulted on its loan repayments but this default was quickly rectified. On the 10^th June Mr Woolf wrote to Mr Broughton at the National Westminster Bank Chesterfield a letter in which he states that:-

"We would like to set up a new current account with you in the name of Brampton Manor Health & Fitness Ltd. This account would receive our fee income (in particular our £20,000 BACS run), receive other cheques, pay our salary bill of £14,000 per month by BACS and have its own chequebook. We have no need of a loan or overdraft facility. Clearly this account would need to be in place and operational quickly to receive cheques and the BACS run at the end of the month."

32. This request was not successful. However it seems from a letter of the 16^th July 2002 from the Alliance & Leicester (Giro Bank) to Mr Woolf that an account at that bank had been opened in the name of Fitness and, from the statements of that account in evidence, had accumulated a credit balance of £8,510.50 as at the 26^th July 2002. Those statements show that by the 15^th August that credit balance stood at £41,370 two days after Leisure's default in payment of the August instalment on its term loan. On the 29^th August, the day before the Bank's letter of the 30^th August seeking payment of the outstanding indebtedness from Leisure to the Bank of £24,488.15 the balance in this account was £18,908.35. It seems that the source of these credits was club income, which in the past would have been collected by Leisure and credited to its current account albeit that some or all of it may have notionally passed through Fitness in 1998 and 1999. The actual sources of that income is not clear.
33. On the 23^rd June 2002 Mr Woolf wrote to Mr Lindsay, an official of the Bank who had previously had overall supervision of the management of Leisure's accounts with the Bank as Regional Business Manager based at the Bank's Carlisle branch. The first part of that letter reads as follows:-

"Trevor should have been paying certain monies into our account 2 as distinct from account 1. This is for VAT purposes. We have received further advice from Tenons.

I would be obliged if you would, as a matter of urgency, rename account 2 as "Brampton Manor Health & Fitness Club Ltd". This account should deal with Membership income separately and should receive the BACS run and pay the salaries and wages. Account 1 is for everything else (e.g. bar, restaurant etc). We have been keeping separate accounts which we thought was sufficient but Tenon advise that it would be better if we utilise our banking accounts as above.

Could you please therefore confirm by return:

1. Account 2 is renamed as Brampton Manor Health & Fitness Club Ltd. That we are in order to pay cheques into this account (we have several pending).

3. [Sic] that if we carry out the BACS run normally at the end of this month the monies will be paid into Brampton Manor Health & Fitness Club Ltd.

4 That the salaries & wages will be paid from the Brampton Manor Health & Fitness Club Ltd account.

This matter is urgent and thus I would be obliged if you could confirm by return that this is in order. Once the BACS/salary end of month process has taken place within Brampton Health & Fitness Club Ltd you can transfer the excess as normal, to Brampton Manor Leisure Ltd."

34. This letter refers to an "account 2". That account was referred to throughout the proceedings as the "cash management account". It has been largely unused, but, according to Mr Woolf, was to be used for the purpose of receiving membership subscriptions payable to Fitness by various means as part of the VAT avoidance schemes.
35. On the 26^th June 2002 Mr Woolf sought an answer from Mr Lindsay to his letter of the 23^rd. The rest of the letter reads as follows:-

"The end of the month is approaching and we have a batch of cheques (£2,392) made out to Brampton Manor Health & Fitness Club Ltd that should be processed via the Brampton Manor Health and Fitness Club account.

I will pay these in today so that they can be credited to account 2 (Brampton Health & Fitness Club Ltd)."

36. It seems, however, that these cheques have been credited to Leisure's current account because they appear as credits on statements of that account. The paid cheques are not available and so it cannot be confirmed that they were made payable to Fitness. They may have been payable to "Brampton Manor Health and Fitness Club". It is Mr Woolf's case that they were payable to Fitness and the fact that they were credited to Leisure's current account is a continuation of a past practice in which payments in various forms payable to Fitness were collected by Leisure and credited to Leisure's accounts at the Bank. On the 26^th June Mr Allison from the Bank's Credit Restructuring department, who reported to a Mr Thomson, informed Mr Woolf that it would not be possible to negotiate cheques or other payments payable to Fitness into accounts in the name of Leisure and that, to be able to negotiate payment, would require Fitness to go through the formalities of opening an account in its name at the Bank.
37. It is this refusal which gives rise to the fourth issue between the parties. Mr Woolf alleges that it breaks an established practice whereby payments to Fitness were received into Leisure's accounts without adequate notice of the change of policy by the Bank. He alleges that this sudden change of policy which he describes as the "derecognition of Fitness" has denied Fitness, and through Fitness, Leisure, access to monies intended to be paid to Fitness but which would then be paid on to Leisure. It also, he alleges, disrupted the recruitment of new members of the club and the payment by existing members of their subscriptions. He alleges that in consequence the cash available to Leisure at the time of the demand on the 20^th August was substantially reduced. Mr Woolf's presentation of Fitness as a company actively engaged in providing leisure services to the public is contradicted by Fitness' filed accounts for the years 2000 and 2001, signed by him, which show it to have been dormant during those years.
38. Notwithstanding that Leisure's default in payment of its loan instalment for June 2002 was quickly rectified the company's financial position again deteriorated and Leisure defaulted in payment of the July and August instalments with the consequences already described.
39. There are a further three issues between the parties, one of which is not pleaded, in Leisure's particulars of claim which were drafted by counsel in April 2004 at a time when Leisure was professionally represented. The first of these issues, which I will call the fifth issue, concerns the payment by the Bank of a fee of £2,604.75 to Colliers Conrad Ritblat Erdman ("Colliers") on the 6^th December 2001 for valuation services.
40. Colliers had been instructed by the Bank to prepare a valuation of the Bank's security over the Brampton Manor premises. It is common ground that under normal circumstances the Bank would have been entitled to do this under clause 13(iv) of the facility letter dated the 8^th May 2000. The Bank's instructions to Colliers were prepared in consultation with Mr Woolf who, for his own purposes, was seeking a separate valuation of a part of the Brampton Manor premises upon which outline planning permission had been obtained for the construction of a hotel which Mr Woolf was contemplating might have been separately developed and sold or its value otherwise separately realised. It is Mr Woolf's contention that Colliers never properly performed this aspect of their instructions and in consequence they should not have been paid and Leisure's current account debited with the cost.
41. The sixth issue concerns Leisure's complaint that its PDQ machine, whereby payments were made to it by credit card was cut-off by the Bank, on or about the 17^th July 2002, as part of an alleged campaign by the Bank to procure that Leisure fell into default with its loan repayments. This allegation is simply denied by the Bank's witnesses who say that the PDQ machine was unplugged by Leisure when, as the Bank later discovered, it started to divert its receipt of payments to its account at the Alliance & Leicester.
42. The seventh issue, which is not pleaded in the particulars of claim, is whether, on a construction of the 20^th October 2000 Settlement Agreement the Bank is liable to make contribution to the costs incurred in supporting the police investigation into the alleged fraud by Mr Marples. The Bank deny that the agreement can be construed in this way.

Conclusion

The Bank's alternative defence

43. It is convenient first to consider the defence pleaded by the Bank at paragraph 46A which I have set out above. This defence was not raised in the Bank's application for summary judgment. I have already referred at paragraph 11 to the principle behind the decision of the Court of Appeal in the Byblos Bank case and to a passage at page 249 of the report of that case from the judgment of Lord Justice Nicholls. That passage reads as follows:-

"As already mentioned, Rushingdale's inability to pay its debts was not relied on by the bank as a ground authorising the appointment of a receiver either when it made the appointment or in the court below. When the bank made the appointment it could not have had all the accounting material subsequently obtained from the receiver, and this may explain why this ground was not relied on originally. Moreover, although not originally relied on, this point would be open to the bank at the trial of the actions, and it would be idle for these actions to go to trial on an issue to which a complete answer exists, provided (as here) the party against whom the point is being taken has had adequate notice of it and a proper opportunity to adduce evidence on it in this court."

44. The Bank was given permission further to amend its defence by the inclusion, inter alia, of paragraph 46A by the order of Mr Justice Rimer made on the 8^th September 2006. At the same time Mr Justice Rimer gave permission to Leisure to file a further amended reply which deals with paragraph 46A at paragraphs 28 and 29 as follows:-

"28 As to paragraph 46A(1) – these accounts were a first draft and the Bank was well aware of the VAT transaction – this reason was not cited at the time of the demand and played no part in that demand.

29 As to paragraph 46A(2) the company was forced into opening an A&L account as the Bank suddenly refused to accept Fitness monies. The Bank refused to accept monies from the A&L account to make Term Loan payments."

45. Mr Woolf did not suggest to me that there was any evidence relevant to the Bank's paragraph 46A defence which he wished to call and was not already before the court.
46. It seems clear that if the 2001 VAT Scheme Dispositions were effective to dispose of the assets of Leisure in the way that they describe, they constitute breaches of paragraphs 11 – 14 of the Loan Master Agreement dated the 12^th December 2000, set out at paragraph 2 above, and of clauses 4.1.3, 4.2.1, 4.10 and 4.13 set out at paragraph 7 above. If those Dispositions were effective it is also clear that Leisure committed events of default under clauses 7.2 and 7.7 of the Debenture. In consequence the Bank would have been empowered to appoint administrative receivers under clause 9.1, having made demand.
47. It was Mr Woolf's contention for Leisure that the 2001 VAT Scheme Dispositions were not effective because Judge Langan had pronounced them so by his order of the 13^th January 2003.
48. Neither Judge Langan's order nor the short judgment which accompanied it made plain the basis upon which he found that Leisure's lease to Funday and its sale of its business to Funday did not bind Leisure and conferred no interest on Fitness after the assignment to it by Funday. As I have already pointed out the Receiver's case was pleaded on the basis that the documents recording those Dispositions were "shams". This part of the order passed by consent and no question of the judge's jurisdiction to make the order seems to have arisen. It seems to me unlikely that the judge in making this order was accepting a submission that the documents were shams. In my judgment they plainly do not fit the definition of a sham contained in the judgment of Diplock LJ in "Snook v London & West Riding Investments Ltd [1967] 2 QB 786 that is "acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."
49. It is clear, from the documentary evidence and from that of Mr Woolf, that the documents were signed by Mr Woolf in something of a hurry in order to start the effect of a new VAT avoidance scheme as early as possible in 2001. The documents were intended by Mr Woolf to create a factual situation which could be relied on to exempt member's subscriptions from VAT. It follows that the documents were intended to create rights, as their terms appeared to record, and were not shams. Mr Woolf accepted this in the course of his closing submissions. It is noticeable that, in the transcript of the exchanges between counsel and Judge Langan leading up to his order, there is a mention of "transactions at an undervalue". However the powers conferred by section 238 of the Insolvency Act 1986 are not exercisable by administrative receivers and section 423(i)(c) requires it to be established, in addition, that the respondent's purpose was either to put the assets beyond the reach of a claimant or otherwise to prejudice his interests in relation to his claim, see sub-section (iii).
50. If it be the case that Mr Woolf was intent on setting up a bona fide scheme for the avoidance of VAT and the 2001 VAT Scheme Dispositions were entered into genuinely to create a leasehold interest and to transfer Leisure's business to pass through Funday to Fitness, as appears to be his case, it is not open to him now to contend that those dispositions were ineffective and capable of being "torn up". Particularly is this so where, until he thought better of it, Mr Woolf relied on the lease created by Leisure and assigned to Fitness initially to resist the Receiver's application for possession of the Brampton Manor premises. See Tinker v Tinker [1970] Probate Div p 136.
51. At paragraph 46A (2) of its further amended defence the Bank allege that the diversion of funds starting in July 2002 to an account in the name of Fitness at the Alliance & Leicester constituted a similar breach of the Loan Master Agreement and the Debenture. In the light of the apparent sale of the business being conducted by Leisure and its transfer ultimately to Fitness on the 1^st January 2001 this, though in the circumstances arguable, is less clearly the case than the dispositions alleged in paragraph 42A(1). If however my conclusion that the 2001 VAT Scheme dispositions were effective transactions is wrong so that these funds unquestionably belonged to Leisure then their diversion clearly did constitute a breach of the Loan Master Agreement and the Debenture.
52. In the result I find that, by Mr Woolf's own admission, Leisure, was, at the time of the demand on the 20^th August 2002, in breach of the provisions of the Loan Master Agreement and had been party to events of default under the Debenture which justified that demand, even if no express reliance was placed by the Bank on those breaches and events, which justified making the demand and appointing the Receivers.
53. It follows that this action fails and it is unnecessary for me to undertake an examination of whether the Bank's demand and consequent appointment of Receivers was justified by the matters actually relied on. In case this matter goes further, however, I will do so, if in rather less detail than might otherwise have been the case.

The Bank's main case

54. I will deal with each of the issues 1 to 7 that I have described above in the same order.
55. The first issue between the parties is described at paragraph [13] above and is a pure issue of fact which depends on whether I accept the evidence of Mrs Thornton or that of Mr Woolf as to what passed between them in the course of a telephone conversation on the 1^st September 1998. I have come to the conclusion that I must accept the account of that conversation given by Mrs Thornton. Mr Woolf does not suggest that Mrs Thornton, in giving evidence, was seeking to mislead the court. He contends that she either misunderstood him or her recollection is at fault. It is his case that, in the course of the conversation, he did not enter into any contract on behalf of Leisure to be party to the Swap Agreement of which Mrs Thornton had given him the figures. He says that he simply asked her to send to him the relevant documentation to peruse.
56. It seems to me that Mrs Thornton was a witness of truth and her account that Mr Woolf agreed on behalf of Leisure to be bound by the terms of the Swap Agreement, subsequently recorded, is to be accepted. Her account is consistent with Mr Marples' letter to Mr Lenney of the Bank, of the 4^th September 1998 at paragraph (1) of which he says "the interest rate hedging and swap rate has now been agreed and is in place." More importantly it is consistent with the minutes of a board meeting of Leisure, approved by Mr Woolf, which took place on the 2^nd September in which Mr Woolf is recorded as having "reported that the interest rate on £500,000 of the Clydesdale's loan had been fixed at 7.2%". Although the rate actually fixed was the lower rate of 7.05%, presumably because the market rate moved downwards between the telephone conversation and the related transaction by the Bank in the money market, this minute shows that Mr Woolf regarded Leisure as being committed to an interest rate fixing transaction.
57. It is unfortunate that the "slip" which Mrs Thornton would have passed to her "back office" recording the transaction and the documentary record of the Bank's consequential transaction on the money market have gone missing but their absence does not undermine my conclusion. Neither does the fact that Mr Woolf may not have signed, or, indeed, have read the terms of the ISDA Master Agreement, subject to which terms all such money market transactions were conducted. Leisure, through Mr Woolf, had already been party to such a transaction through the National Westminster Bank and it was in the nature of such transactions where the market interest rate was continually moving that transactions had to be concluded in the course of conversations, usually on the telephone, sometimes upon terms slightly different from those upon which the Bank's customer had agreed to be bound.
58. I turn to the second issue which is described at paragraph [15] above. None of the Bank's witnesses were present at the meeting on the 25^th March which is referred to in the letter of the 23^rd March 1999 as the place for completion of the new Term Loan Agreement. It was Mr Woolf's evidence that the terms of the new Loan Arrangement were agreed at that meeting and all the relevant documents signed. In particular he said that a blank confirmation letter and its accompanying copy of the ISDA Master Agreement were amended and a copy of the final page of the latter signed by him in the course of the meeting. It was Mr Woolf's evidence that in the course of the meeting the terms of the new arrangement set out in the letter of the 23^rd March were re-negotiated. He initially said that the "cap rate" of 9% in the collar provisions had been negotiated down but later changed his mind to say that the "floor rate" of 5.6% had been negotiated down to between 5% and 4%. It was because the rate fell to below 5.6% early in the operation of the November 1999 Loan Agreement that money became payable by Leisure to the Bank.
59. On the 6^th April Mr Dobbin of the Bank, who signed the documents recording the new Loan arrangement on the Bank's behalf wrote to Mr Marples as follows:-

"With reference to the Interest Rate Collar we concluded on 6^th April 1999 to close out the Interest Rate Swap detailed in our Confirmation Letter of 2^nd September 1998, please find enclosed our confirmation in duplicate.

One copy for yourselves and the other to be signed in accordance with your Bank Mandate and returned to us at your earliest convenience.

We also confirm the rate for the period 6^th April 1999 to 6^th July 1999 has today been set at 5.26516%.

As this is lower than the floor rate of 5.6% we will debit your account at our Newcastle Branch with £417.40 value 6^th July 1999 calculated as undernoted."

60. In evidence was a photostat of a confirmatory letter recording the terms of the collar provisions in accordance with the Bank's case signed by Mr Dobbin and Mr Woolf. A further photocopy of that letter signed by Mr Dobbin but not by Mr Woolf was produced by Leisure on disclosure. It is Mr Woolf's case that the photostat of the confirmatory letter appearing to be signed by him was forged by the Bank to show his signature. It is certainly the case that for a time the Bank informed Mr Woolf that they had the original of this document but it seems that, like many other important documents in this case, the Bank has mislaid the original. However they have been able to produce the record of the supporting money market deal dated the 7^th April 2000.
61. I have come to the conclusion that I cannot accept Mr Woolf's account of the meeting on the 25^th March 1999 and its aftermath. I can see no reason why the Bank should be so concerned by their banking relationship with Leisure, a minor customer, that they should go to the trouble of forging the signature of a director of that customer confirming the terms of a relatively small scale collar agreement.
62. It follows that in my judgment the balance of account between the Bank and Leisure is not affected by the deductions made by the Bank pursuant to the September 1998 Loan Agreement or the March 1999 Loan Agreement.
63. The third issue is described at paragraph [21] above. I have come to the conclusion that Mr Woolf indicated Leisure's consent to the new arrangements recording the November 2000 Loan Agreement by signing the loan documents subject to the written endorsement that I have described. Notwithstanding that endorsement the Bank made the increased advance. It follows that where the terms of the November 2000 Loan Agreement conflict with those of the May 2000 Loan Agreement the Bank must be taken to have agreed that the latter terms prevail. It further follows that the Bank have wrongfully deducted £15,563 from Leisure's accounts and that the account between the Bank and Leisure as at the 20^th August 2002 must be adjusted accordingly. I do not accept that this amount falls to be reduced because there were outstanding unpaid cheques drawn on Leisure's current account. That indebtedness might have been paid from another source. Indeed there was evidence that at least one of the creditors concerned was paid from Fitness account at the Alliance & Leicester.
64. The 4^th issue is described at paragraph [37] above. Whereas it seems possible that the Bank were on notice of the VAT avoidance scheme in operation in 1998 and 1999 and of the role of Fitness in that scheme, I am not satisfied that the evidence establishes a practice whereby the Bank accepted and negotiated payments to Fitness crediting them to Leisure's current account. It may be that low denomination cheques made payable to Fitness were from time to time paid into Leisure's account and that standing orders payable to Fitness were received through the BACS system using Leisure's reference number appearing on the club membership application form. In my judgment this is far from establishing an established practice by which the Bank accepted payment of monies to Fitness through Leisure's account so that the Bank were estopped from terminating such an arrangement without reasonable notice. Even if that conclusion is wrong I am not satisfied, on the evidence, that Leisure suffered any measurable financial loss as a result of the Bank's refusal to credit payments to Fitness on the 26^th June 2002 and thereafter. There is no evidence of the nature of the payments which resulted in the credit entries to the account at the Alliance & Leicester in the name of Fitness, but I am satisfied that the credits to this account represent such of the income derived from the Club and its premises which was not being credited to Leisure's accounts. I do not accept that the credit balances in this account were not available to Mr Woolf to discharge the July and August instalments under the Term Loan Agreement.
65. I turn to the fifth issue described at paragraphs [39 and 40] above. In my judgment none of the events surrounding the Bank debiting Leisure's current account with Collier's fee affected the Bank's right under clause 13 (iv) of the 8^th May 2000 facility letter to debit that account with the costs of periodic valuations of the Bank's security.
66. I turn to the sixth issue described at paragraph [41] above. I accept Mr Allison's evidence that the Bank did not deactivate the PDQ machine being operated by Leisure so as to deny to Leisure payments which would otherwise have been received using that machine. Given the Bank's exit strategy in July 2002 there was no sensible incentive for them to do so. In any event the machine could only be "unplugged" at Leisure's premises.
67. As to the seventh issue described at paragraph [42] above, in my judgment the terms of the 20^th October 2000 Settlement Agreement cannot be construed so as to require the Bank to contribute to any costs incurred by Leisure in supporting the police investigation into the alleged fraud by Mr Marples.
68. It will be seen from these conclusions that the only issue which I regard as capable of affecting the balance of account between the Bank and Leisure as at the 20^th August 2002 is the third issue which results in an adjustment of £15,563 in favour of Leisure. It was Mr Woolf's contention, that at the 13^th August 2002 when default was made in payment of the August instalment of the Term Loan, the Bank could have applied the unused balance of Leisure's overdraft facility of £8,258 in reduction of the amount of the two unpaid instalments of £20,769 leaving Leisure some £12,500 to find. In my judgment this contention is misconceived. Any further debits to Leisure's overdrawn current account were repayable on demand. The effect, therefore, of drawing on this account to meet instalments becoming due on the Term Loan would simply be to alter the account at the Bank recording £8,258 of Leisure's indebtedness to the Bank. It follows that even if Leisure's current account were credited with the amounts deducted by the Bank under the third issue that would not have constituted repayment to the Bank and there would still have been a default in payment of part of the instalments due on the Term Loan Agreement for July and August 2002.
69. It follows that this action fails under this head also.