England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building, Royal Courts of Justice, 7 Rolls Buildings, Fetter Lane, London EC4A 1NL
		21st November 2012

1. MR JUSTICE NEWEY: This is an appeal from a decision of Chief Registrar Baister dated 6 February 2012. The appeal concerns the application of section 265 of the Insolvency Act 1986. That provision, so far as relevant, provides that a bankruptcy petition is not to be presented unless the debtor:

"(c) at any time in the period of 3 years ending with that day"

-- that day being the day of presentation --

"(i) has been ordinarily resident, or has had a place of residence, in England and Wales, or

(ii) has carried on business in England and Wales."

The appeal focuses on (ii): the requirement for a debtor to have "carried on business in England and Wales" in the three years ending with the day of presentation.

2. The case has its origins in loan facilities which the appellant, Anglo Irish Bank Corporation Limited, granted between 2000 and 2004 to seven English companies which have been collectively referred to as the Pentagon Group. The respondent, Mr James Flannery, guaranteed each of those facilities.
3. It is common ground that Mr Flannery's sister Ellen O'Donoghue has been the sole director of each of the seven companies. Where the parties differ is in relation to the role that Mr Flannery himself has played with regard to the companies and the property investments which they effected. I should say that each of the companies was a special purpose vehicle set up with a view to property investment in London.
4. Mr Flannery and his sister have each provided written evidence dealing with the companies and Mr Flannery's connection with them. Mr Flannery's account is to be found both in a combined notice of objection and witness statement of 17 September 2010 and in a further witness statement of 2 November 2010. The thrust of Mr Flannery's account is to the effect that he has not himself ever participated in the management of the Pentagon Group which, he says, has been undertaken by his sister.
5. So far as the ownership of the Group is concerned, Mr Flannery has maintained that the Group is ultimately owned for the benefit of his children. According to Mr Flannery, there was a stage when he was beneficially interested, but that has not been the case since 2003. Mr Flannery gave these details in paragraphs 8 to 11 of his second witness statement:

"Since incorporation, the shares in Pentagon Group have been held by Ashley Nominees Limited. The shares have been held by them for different nominees from time to time. It is true that initially the nominee for whom the shares were held was Baker Trust, but that trust came to an end in 2001, when the shares were transferred to me. I then re-settled the shares into a new trust. That trust was wound up in 2002 and the shares were transferred to me again. All the trusts were discretionary with the result that the assets could devolve to any of the beneficiaries.

I have seen the Declaration of Trust dated 23 January 2003 exhibited to Mr Gould's affidavit"

-- I should say in that connection that the relevant declaration of trust was one in favour of Mr Flannery personally --

"I have discussed the declaration with Mortimer Walters of Adams Solicitors who prepared it and who has reminded me that for a short period at the end of 2002/beginning of 2003 there was discussion about my possibly becoming resident in the United Kingdom in connection with a technology investment company I was involved in which was considering relocating to the United Kingdom. Because of this, it was important that I should not have a beneficial interest in the shares in Pentagon Group so I re-settled the shares into a different trust of which I was not a beneficiary. The re-settlement took place in March 2003, some two months after the date of the document produced by Mr Gould.

Mr Walters has further reminded me that the declaration was prepared in anticipation of my move but in fact the relocation never took place and any discussions about my becoming resident in the United Kingdom were abandoned as a consequence. As a result of the re-settlement of the shares in Pentagon Group, Ashley Nominees Ltd executed a fresh Declaration of Trust dated I believe the 19 March 2003. As I am neither a Trustee, nominee or beneficiary, I do not have in my possession a copy of the fresh Declaration of Trust. Upon my instruction Edwin Coe"

-- who are Mr Flannery's solicitors --

"asked Adams Solicitors whether they have a copy of this Declaration of Trust. I am informed by Edwin Coe that to date they have not been sent a copy of my letter of instruction of 19 March 2003 to Ashley Nominees Ltd disposing of my interest in the shares to the new Trustee, together with the unexecuted nominee agreement.

I am further informed by Edwin Coe that Mr Walters has confirmed that the nominee agreement was executed and this document remains in force today and that it has not been superseded by any subsequent declaration."

6. For her part, Mrs O'Donoghue said this:

"I have been asked to respond to one specific matter concerning the involvement of James Flannery in Pentagon Group of companies. As the sole director of the Company it is within my own knowledge that at no time has James Flannery been involved in the management of any of the Companies. I am a Chartered Accountant by profession and sufficiently qualified to manage the Pentagon Group. In addition, the Company has its own business premises and employs permanent staff to whom I delegate relevant matters in order to manage the business of the Group.

From time to time I may consult James Flannery regarding certain business aspects of the Group but this is primarily to draw on his expertise in property investments and developments. In addition, when, for example, dealing with Anglo Irish Bank, I would certainly have consulted with James for the simple reason that he was acting as guarantor but also in response to Anglo's request for further equity injections into the business.

Finally, I can confirm that James does not receive any form of income from the Pentagon Group."

7. The quotation from Mr Flannery's witness statement included reference to a letter of instruction of 19 March 2003 and a declaration of trust of the same date. Those documents have been exhibited to a witness statement made by a partner in Edwin Coe. The declaration of trust provides essentially for shares to be held on trust for Consultoria Comercial Europea SA, for which an address in Andorra is given. Andorra, I should say, is where Mr Flannery lives and, if I have it right, an address for that entity has been found to be also an address at which Mr Flannery has an office.
8. The loans which the bank made to the Pentagon Group have not by any means been fully repaid. That being so, the bank has sought recovery from Mr Flannery as guarantor. In due course, a statutory demand was issued and served. That not having produced repayment, the petition with which I am now concerned was presented on 5 August 2010.
9. The procedural steps which followed were explained to me carefully by Mr Matthew Hardwick, who appears for the bank. Cutting matters short, what happened was that by an order made by the Chief Registrar on 9 August 2011 it was directed that there should be a further hearing in relation to:

"…the interrelated issues as to (1) whether permission to serve out of the jurisdiction should have been granted; and (2) whether the Petitioner does have a good arguable case that it can satisfy the requirements of section 265 (1)(c)(ii) of the Insolvency Act 1986."

10. Those issues came before the Chief Registrar at a hearing in January of this year, and he delivered a written judgment on 2 February. He expressed his conclusion in these terms in paragraph 35 of his judgment:

"Looking at the totality of the evidence, I conclude, with some misgivings and some sympathy for the petitioning creditor, that the creditor does not have a good arguable case that it can satisfy the jurisdictional requirements of section 265(1)(c)(ii), even on the basis of the generously low test formulated in Nimenia Maritime Corporation and that I should not have given permission to serve out of the jurisdiction on the basis that the petition had a reasonable prospect of success."

11. The Chief Registrar's reference to the "generously low test formulated in Ninemia Maritime Corporation" can be related back to paragraph 9 of the judgment in which the Chief Registrar explained that both sides had accepted that the petitioning creditor had to demonstrate that it had a good arguable case. The Chief Registrar went on to say that Mr Hardwick, who then, as now, was appearing for the bank, relied on the Ninemia Maritime case, in which Mustill J described a good arguable case as "one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success". The Chief Registrar also recorded that counsel then appearing for Mr Flannery had not challenged that proposition.
12. The guts of the Chief Registrar's reasoning can be found in paragraph 31 of his judgment. In that paragraph, the Chief Registrar said this:

"Attractively as Mr Hardwick put the petitioning creditor's case for this court's having jurisdiction, both on 9 August 2011 and on 25 January 2012, when one examines the evidence closely and hears argument on it, it soon becomes clear that the petitioning creditor knew and knows very little about the debtor and the affairs of the Pentagon Group. The only facts of which I could be sure are that the Debtor is an Irish citizen who lived and continues to live in Andorra, was (and still may be) wealthy, has international business interests, had some involvement with the petitioner in the arrangements made back in 2000 to finance the activities of the Pentagon Group - and perhaps in 2006 (when the facilities were consolidated) - had a beneficial interest in the shares at some stage, and acted as guarantor of the group's debts, in which capacity he had further involvement as guarantor when the group failed to repay what it had borrowed. I also know that he has failed to honour his guarantee, which does him no credit but is not relevant to the issue I have to decide. There is no evidence that he was involved in any way in directing or managing the affairs of any group company, and the only director flatly denies that he ever did. The most he seems to have done is to renegotiate the petitioner's facility and provide property advice to Mrs O'Donoghue. Anything more requires inferences to be drawn on the basis of Mr Gould's understanding of what was or was perceived, perhaps wrongly, to be his position in 2000, and those inferences are also weak."

13. In arriving at his conclusions, the Chief Registrar analysed the decision of the Court of Appeal in In re Brauch [1978] Ch 316, which dealt with section 4(1)(d) of the Bankruptcy Act 1914, a predecessor of section 265 of the 1986 Act. As the Chief Registrar noted, there are similarities between that case and the present one, at any rate in the fact that a number of companies had been used to effect property investment. It was argued that the debtor could not be said to have been carrying on business in England and Wales himself because the relevant business was that of the companies. The Court, however, drew a distinction between carrying on the business of a company and carrying on a separate business. At page 328, Goff LJ said:

"[I]t would be wrong to hold that section 4(1)(d) applies to a man who is running his company's business even though he be the sole beneficial shareholder and in complete control. There is, however, nothing in Salomon v. Salomon and Co. Ltd. inconsistent with finding that such a person is also conducting a separate business of his own….."

Later in his judgment, at page 330, Goff LJ said:

"[O]ne has to take the totality of the evidence and see whether or not the right conclusion is that there was, as, in my judgment, there was in this case, a business being carried on by the debtor independently of the business of the companies."

14. Seeking to persuade me that in the present case there is at any rate a good arguable case that Mr Flannery was in the relevant period carrying on a business in England and Wales independently of the business of the Pentagon Group companies, Mr Hardwick focussed in particular on three documents or sets of documents. The first document is a credit committee application dating from October 2000. That identifies one of the Pentagon Group companies, Pentagon Estates Limited, as the borrower, gives its business as property investment and identifies the purpose of the proposed facility as assisting with the purchase of a property in London. The form goes on to refer to the fact that security is to include a guarantee from Mr Flannery. The narrative includes this:

"Pentagon Estates Ltd … is newly formed for the purchase of the property. Its director John P Flannery is an Irish citizen currently resident in Andorra. Flannery is in the process of selling his 50% share in Emerald Builders Inc, which is expected to achieve in excess of US$60 million - in addition Flannery has net property assets in the UK of £2 m; further properties in Europe net £1.5 m + cash & share portfolio of £3 m.

Michael O'Sullivan"

-- who I should say worked for the bank --

"has been introduced by Mortimer Walter of Adams (Solicitors) who he has known for many years and considers highly respectable."

15. At the very end of the form, the author says this:

"There are potential new opportunities in the future both in UK/Ireland for the Bank particularly as Flannery is currently reviewing a number of transactions."

16. Mr Hardwick said that it was apparent from this document that it was Mr Flannery (who Mr Hardwick accepted was not in fact a director and whose Christian name was James rather than John) who approached the bank for funding in 2000. He said, too, that the form showed the importance that the bank attached to Mr Flannery's involvement with the application. I have to say, however, that to my mind this document does not take Mr Hardwick very far. The document shows that Mr Flannery was to give a personal guarantee, but taken on its own that can be explained in more than one way; it does not obviously carry the inference that Pentagon Estates Limited was to be used as part of a business carried on independently by Mr Flannery. Further, the fact that the bank hoped to obtain further business via Mr Flannery does not seem to add anything of importance.
17. The next document that Mr Hardwick focussed on was a bank memorandum of 3 November 2000, which deals in particular with whether certain conditions precedent have been satisfied. The document notes that the bank has been happy to dispense with the requirement for bank/credit references "given the introduction i.e. Adams Corporate Solicitors (Mortimer Walters) to Anglo Dublin (Michael O'Sullivan)". It is further recorded that Mr Walters "has verbally confirmed that he has known JP Flannery for 16 years". Of itself, that does not seem to me to go anywhere very much either.
18. Potentially of more significance is what follows later in the document. In particular, the document includes this:

"Borrower is registered in England; the shares in the Borrower are held by Ashley Nominees Ltd, an Irish registered company set up and controlled by Adams Corporate Solicitors for the purpose of holding the shares in trust for the Baker Trust - with the ultimate beneficial owner being JP Flannery."

19. That provides an indication that the bank understood the ultimate beneficial owner of the structure to be Mr Flannery. But of course that is not inconsistent with the evidence which Mr Flannery has himself given in those proceedings. It is Mr Flannery's evidence that, although he had, at least at earlier stages, been the ultimate beneficial owner of the structure, he ceased to have any beneficial interest in 2003.
20. Thirdly, Mr Hardwick took me through correspondence dating from 2008 to 2009 between the bank and Mrs O'Donoghue, leading up to a meeting on 3 April 2009. The correspondence itself does not seem to me to advance Mr Hardwick's case. It confirms that the bank attached importance to Mr Flannery's role as a guarantor. It does not appear to me to provide any real evidence that Mr Flannery had a role in the management of the Pentagon Group companies, and it also provides some evidence of Mrs O'Donoghue herself undertaking company business, and indeed attending a meeting with the bank at which Mr Flannery was not present.
21. Mr Hardwick relied particularly on the last bullet point in a file note for the 3 April 2009 meeting. This states:

"James Flannery confirmed that he would personally review the position and revert accordingly with a proposal / strategy based on the Banks issued terms".

22. That, however, seems to me to be of no real relevance. Mr Flannery was plainly important because he was the guarantor. I do not think that that last bullet point provides any significant evidence that he had a wider role.
23. One point which does seem to me to matter is that there is really nothing to gainsay Mr Flannery's claim, made by way of witness statement and supported by what appear to be contemporaneous documents, that he ceased to have any personal interest in the structure in 2003, from which point the Pentagon Group companies were ultimately owned for the benefit of his children. There being, as I say, nothing so far as I can see of any weight to contradict that, it must, even aside from all other factors, be very hard to sustain the contention that Mr Flannery was himself carrying on business in connection with the structure in the relevant period (i.e. between 2007 and 2010). Even if there were substantially more evidence than there is of Mr Flannery involving himself with the affairs of the Group and the entities behind it, I would find it difficult to see how it could be maintained that Mr Flannery was carrying on business himself. On the basis of what Mr Flannery has said, which, as I say, there is really nothing to gainsay, any involvement he had with the structure was on behalf of a structure ultimately existing for the benefit of his children and not himself.
24. Be that as it may, it seems to me that the evidence amply supports the conclusion which the Chief Registrar arrived at. Mr Stephen Davies QC, who appeared for Mr Flannery, referred me to the White Book at 52.11.4 for guidance as to the circumstances in which I would be justified in interfering with the Chief Registrar's decision. The passage to which I was taken indicates that I could interfere if the Chief Registrar had taken into account immaterial factors, omitted to take into account material factors, erred in principle or come to a decision that was impermissible or "plainly wrong". To my mind, the Chief Registrar did not fall into error in any of these respects.
25. Mr Hardwick, in a balanced examination of the Chief Registrar's judgment, found relatively little fault with what the Chief Registrar had to say. Doubtless certain of his points could potentially have been expressed differently but they do not, as it seems to me, provide a basis for saying that the Chief Registrar erred in the sorts of respect indicated in the White Book. I would go further and say, not merely that the Chief Registrar was entitled to arrive at the decision that he did, but that I would myself arrive at the same conclusion on the basis of the evidence which was before him and which is now before me.
26. Mr Hardwick referred in particular to paragraph 33 of the judgment, in which the Chief Registrar compared the facts of the present case with those in Brauch. What the Chief Registrar had to say there is not in my view open to any substantial criticism. In any event, the Chief Registrar was merely using the comparison in support of the conclusion which he explained elsewhere in his judgment that the bank had not established the requisite good arguable case. I would add that the facts of Brauch were, as the Chief Registrar indicated, substantially different from those of the present case.
27. Mr Hardwick stressed that the bank did not suggest that it yet had all the evidence that it would hope to have. He suggested that the right course would be to allow the matter to proceed with a view to disclosure and cross-examination. The bank, he indicated, would then hope to address weaknesses which at present exist in its evidence.
28. Mr Davies took issue with this approach entirely. He disputed that it could ever be right to order disclosure in bankruptcy proceedings and said that, whether or not it could be appropriate in certain circumstances to direct cross-examination, a petitioning creditor had to be in a position to prove one of the pre-conditions in section 265 of the 1986 Act without resort to disclosure or cross-examination. Mr Davies was inclined to suggest that, given the framework in which bankruptcy operates, it had been an error for the parties to endorse the trial of a preliminary issue as to whether there is a good arguable case that section 265(c)(ii) of the 1986 Act is satisfied. The right approach, Mr Davies suggested, would have been to ask, not whether there was a good arguable case, but whether the requirement had been proved.
29. I do not think I need to explore this aspect of the case any further. The issue which the Chief Registrar in fact addressed himself to (in accordance with the previous order of the court) was whether there was a good arguable case, and he concluded that there was not. To my mind, as I have said, his decision is not open to serious criticism. That being so, I do not need to decide whether it might have been more appropriate to ask, not whether there was a good arguable case, but whether the requirement had in fact been proved.
30. The result, as I have indicated more than once, is that the Chief Registrar's decision must stand, and I shall accordingly dismiss the appeal.
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