England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURTS OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 January 2009

MR JUSTICE FIELD:

1. This is an appeal from the decision of Master Ayer under which the Claimant bank ("The Bank") was granted summary judgment against the Defendant, Mr Derek Martin, for £398,786.97 under CPR 24.
2. The Bank's claim is brought under a guarantee dated 17 January 2003 ("The personal guarantee"), whereby the Defendant guaranteed the liabilities owed to the Bank of IDG Management Services Limited ("MS") referred to in the guarantee as ("The Customer"). To the extent relevant to this appeal the guarantee contained the following inter alia provisions:

"Clause 1.1 - We have agreed or may agree in the future to provide or continue to provide banking facilities to the customer. In return you unconditionally guarantee that all customer liabilities will be paid or satisfied.

Clause 2.1 - This guarantee is a guarantee of the full amount of all customer liabilities.

Clause 3.1 - You will continue to be bound by this guarantee regardless of any change in the amount or nature of the customer liabilities, your death or mental illness or any other matter.

Clause 9.1 - If the customer is a partnership or other organisation this guarantee will stay in force even if there is a change in the organisation's name or membership and it will continue to apply all customer liabilities owed to us by the persons who make up the organisation for the time being.

Clause 9.2 - If the customer becomes insolvent you will remain liable for all customer liabilities as if the insolvency had not happened.

Clause 9.3 - If the customer dies or can no longer manage his or her affairs because of mental illness, this will not affect your commitment --" (Quote unchecked)

Could I ask that someone provide me with a clean version of 9.3 and I can put that in on correcting the transcript? Thank you very much.

3. Customer liabilities were defined as:

"Any money and liabilities which the customer now owes us or may owe us in the future in any way, this includes liabilities which... it also includes all interest fees and other charges which the customer owes us now or in the future whether or not they are charged to the customer's account." (Quote unchecked)

The Defendant's liability under the personal guarantee was limited to £325,000. MS was part of the IDG group of companies consisting of the following companies in addition to MS: IDG UK Holdings Limited ("UK"); IDG Powex Marketing Limited; IDG Mail Order Limited; Davidson Property Investments Limited; Technology 2001 Limited and Powex Manufacturing Limited.

4. On 10 June 2002 the companies in the IDG group had all entered into a cross-guarantee whereby each guaranteed the liabilities of the others to the bank. Under this guarantee ("the Cross-Guarantee") each of the companies was called a guarantor in its character as a guarantor and each was called a principal in its character as a principal debtor to the bank. Clause 10.6 provided:

"The winding up or dissolution of any principal will not affect the liability of any guarantor under this guarantee in any sum payable to the bank at the date of the commencement of such winding up or immediately prior to such dissolution as the case may be, will be treated as continuing payable until actually paid in full."

Clause 14.1:

"All payments falling to be made by a participant under this guarantee will be made to the bank without any set-off or counter claim and free from any deduction or withholding for on account of any taxes or other charges in the nature of taxes imposed by any competent authority anywhere in the world unless such deduction or withholding is required by law or practice."

5. From September 2005 UK failed to make monthly repayments of a loan that had been advanced to it by the bank with the result that the whole of the outstanding balance of the unpaid loan became due. As at 21 March 2006 the amount owed by UK under the loan was £536,175 and on that date the bank served a written demand on the Defendant under the personal guarantee for £325,000. With interest and costs the sum claimed to be due on 3 October 2008 was £398,786.97, which is the amount for which the Master gave judgment on 9 October 2008.
6. All the companies in the IDG have now been dissolved. UK was dissolved on 29 January 2007 and MS on 22 August 2006. Before the Master the Defendant contended that he had a defence arising out of alleged defalcations on the part of MS's finance director, Mr Keith Fulton, who had confessed to being an addicted gambler. It was submitted that these defalcations involved a breach of the mandate governing the bank accounts of the IDG group companies with the bank or involved transactions which were unauthorised or which had been negligently processed by the bank, with the result that: (1) MS's account with the bank should be adjusted by at least £211,000 or; (2) MS had a cross-claim on which the Defendant could rely for a sum in excess of £211,000. The significance of the figure of £211,000 is that the guaranteed debt due by UK is £536,175 and the personal guarantee is limited to £325,000; thus it is only questionable sums totalling in excess of £211,000 that can possibly found an arguable defence based on breach of mandate, excess of authority or negligence on the part of the bank.
7. In his witness statement put before the Master the Defendant stated:

"In November 2004 Three Cooks Bakeries was finally acquired. As a result I had several meetings with Keith to tell him I wanted him to wind down the IDG group. Keith's reaction to this set alarm bells ringing. There were problems I had not appreciated previously. David had left the IDG group in November 2004 (5.14).

This caused me to look into the ID Group's financial position further. At about this time in mid-2005 Keith admitted to me that he had a serious gambling problem and the full scale of the problem began to emerge. He had, he told me, misappropriated very large sums of money from the ID Group to fund his addiction and this was the cause of IDG Group's position (5.15).

On 17 October 2005 Keith sent an email to me confessing the fact that he had let me down financially and that he had caused serious problems both for himself and many others. This followed on from the conversations where he had told me he had taken monies from the IDG Group to fund his gambling addiction (5.17).

Keith's admission caused me grave concern. The IDG Group was indebted to the Claimant to a very significant level and since 2004 I had been trying to obtain information from the Claimant. It appeared that the Claimant had allowed Keith to fund his gambling addiction with IDG Group's overdraft facilities (5.19)."

8. In the email of 17 October 2005 Mr Fulton said that he owed the Defendant or the businesses £15,000, which he promised to repay. The defendant also exhibited a number of Mr Fulton's bank and personal Barclaycard statements that showed a number of debit entries in favour of gambling entities. In addition the Defendant exhibited copies of correspondence he had had with the bank. By a letter dated 25 April 2006 he said:

"I have reviewed the financial operation of the above companies' accounts to determine how, during a period of severe mismanagement, the bank and the companies' directors did not control what can only be described as a financial black hole. During this process it has come to my attention that payments and cheques may have been presented that did not meet all the criteria set out in the companies' mandates. To this end I now formally request the following..."

9. In a letter dated 30 July 2006 he stated:

"As you are aware from previous correspondence I am instructing Badger Hakim, a specialist fraud accountant, to conduct due diligence over the financial operation of the above companies' accounts to determine how, during a period of severe mismanagement, the bank and the companies' directors did not control what can only be described as a financial black hole. During this process it has come to my attention that payments and cheques may have been presented that did not meet all the criteria set out in the companies' mandates... I am sure the bank wishes also to conclude this settlement as quickly as possible to avoid any unnecessary action, but I cannot agree to any position until I am in full knowledge of the extent of the mismanagement and financial fraud carried out on these companies and if we cannot resolve this situation I will resist any attempt by the bank to collect the guarantee that is now clearly disputed, though through any other means."

10. In a letter dated 8 November 2006 the Defendant said:

"...and our conversation on 25 September 2006 when I clearly explained my position in respect of your claim under my guarantee, I have made it clear to both the relationship managers at Barclays and your department I cannot move forward on this matter without the full data I have requested from the bank and although I fully appreciate the task this involves, you must understand I have already lost a significant amount of money through no fault of my own, and trust between the finance director and company has been betrayed.

What is clear from our initial investigations carried out without your cooperation, funds have been misplaced from the accounts and the company [i.e. IDG Group] without the relevant authority, clearly we are seeking to establish that the bank has fully acted in good faith with the management of the accounts Mr Fulton exercised control over." "As you are aware from previous correspondence I am instructing Badger Hakim, a specialist fraud accountant, to conduct due diligence over the financial operation of the above companies' accounts to determine how, during a period of severe mismanagement, the bank and the companies' direction did not control what can only be described as a financial black hole.

During this process it has come to my attention that payments and cheques may have been presented that did not meet all the criteria set out in the companies' mandates. To this end I now formally request from the bank the following..."

11. In a letter dated 7 December 2006 the Defendant stated:

"I am keen to resolve this to both our satisfactions, but at this moment in time I am faced with an £800,000 investment write off and neither the previous management or Barclays have been responsible in the provision of data and answers on how this went so badly wrong. I trust you will understand my position."

12. Finally, in an undated email sent at some time after 16 February 2007 the Defendant said:

"The former management of IDG companies have accepted they acted with gross misconduct in the financial management of the companies' affairs and it is clear from evidence provided that the financial director was moving funds between accounts without authority. The bank was accepting payments of the loan account from a company to which it had no connection and the companies were significantly in default of their banking covenant, yet at no time did the bank bring these matters to the guarantor's attention even when the guarantor had stated that he had reservations about the bank's financial position and was not willing to provide further undertakings.

It was only after these matters came to a head when an independent audit was carried out that significant financial mismanagement was discovered and the companies' financial director admitted to using company funds to sustain an internet gambling addiction.

We have evidence that shows significant funds were moved from Barclays accounts to his personal accounts and at no time was this matter raised with the other signatories."

13. The Defendant was supplied by the bank with copy ledgers for UK's first current account for the period of 11 months from January 2003. These show that in this period MS had paid via a direct debit mandate a total of £228,436.41 in respect of a corporate Barclaycard credit card, which expenditure the Defendant said was inexplicable. At the hearing before the Master, Miss Stopps for the bank, informed the court that the entity offering the Barclaycard services to the IDG Group was separate from the Claimant bank. In the light of this information Mr Harris for the Defendant accepted that, misuse of the Barclaycard could not give rise to a direct defence, but was evidence of a general nature going to prove the fraudulent misuse of the Group's funds by Mr Fulton.
14. Before Master Ayer the Bank advanced two principal submissions. First it contended that the Defendant's allegations of misuse of corporate money were too vague and insubstantial and contradictory to provide a defence that had a real prospect of success. Second, it submitted that in any event the alleged defalcations could only afford a defence if they gave rise to a cross-claim that was closely connected with the underlying claim by the Bank against the principal debtor and here there was no such closeness because: (1) any cross-claim would bring a claim by MS in the capacity of principal debtor rather than surety and; (2) reliance on a set-off is barred by clause 14.1 of the cross guarantee.
15. Master Ayer accepted the Bank's first submission rendering it unnecessary to deal with its second submission. His reasons were: the evidence before the court shows that the Defendant, despite what he says in paragraph 6.2 of this defence has, in reality, never disputed his liability under the guarantee. Instead he has, from at least April 2006, in other words a month or so after the Claimant's letter of demand, insisted: (1) that he has a set-off that results from breaches of the mandate and the like; (2) that the amount to be set-off may be so significant as wholly to extinguish his liability; (3) that he moreover has evidence of those breaches.
16. Despite that insistence he has never in his pleadings or otherwise or even during the hearing, given a single instance of any such breach nor until the hearing itself has he disclosed a single document, which incidentally proved to fall far short of what would be required to support his contentions. Instead he has again and again maintained that it is for the Claimant to provide him with the disclosure that would enable him to make good those assertions before he gives any example. Counsel contends on his behalf that the authorities show that this approach is permissible. That is entirely wrong. A defendant in this situation can seldom be expected to give any comprehensive or detailed statement of the wrongs on which he relies, but that does not enable him to refrain from giving a single example. The latter is what this Defendant has persisted in doing and his whole case is based on the contention that he cannot do otherwise until after disclosure, though of course, it may even then be impossible for him to do so. It follows that his defence has, in fact, no real prospects of success and the Claimant's application must be granted.
17. In his submissions in this appeal, Mr Harris took a new point; he argued that the effect of the dissolution of MS was that the Defendant had no liability under the personal guarantee. In his submission the words "All customer liabilities" in clause 2.1 of the personal guarantee meant that the customer must have a liability to the bank at the time the guarantee is sought to be enforced, and the effect of MS's dissolution was that since that event MS has had no liability to the bank, because it did not exist. Mr Harris argued that the personal guarantee was the bank's document and as such should be construed against the bank. It had been open to the bank to provide that the liability of the guarantor should continue despite the dissolution of the principal debtor as it had done in the cross-guarantee, but it had not done so in the personal guarantee and must accept the consequences thereof. In my judgment this contention is a weak one. I do not decide the point finally against the Defendant, but I am quite satisfied that it is strongly arguable that under the definition of customer liabilities, what is guaranteed is the undischarged indebtedness of MS whether or not MS has subsequently been dissolved.
18. Mr Harris next contended that the effect of the words "customer liabilities" was that all of MS's liabilities to the bank, whether they arose out of a current account or by reason of a guarantee such as the cross-guarantee, should be lumped together so that any adjustment to the balance on the current account in the Defendant's favour in excess of £211,000 diminished the Defendant's liability under the personal guarantee in respect of MS's liability under the cross-guarantee for the unpaid loan of Barclay UK in 2004. In my opinion it is strongly arguable that the definition of "customer liabilities" does not contemplate MS's current accounts being consolidated with this liabilities (inaudible) surety under the cross-guarantee so as to form, in effect, one overall account. However, I think that Mr Harris's submission is just sufficiently arguable to afford an arguable defence, assuming that there is sufficient evidence of unauthorised transactions for the bank's claim to go to trial.
19. I am also of the view that the argument that any-cross claim that MS might have against the bank for the movements on its accounts in respect of defalcations committed by Mr Fulton is just sufficiently arguable to go to trial, assuming again that there is sufficient evidence of unauthorised transactions. The no set-off or counter-claim provision in clause 14.1 of the cross-guarantee poses very considerable difficulties for the Defendant. Mr Harris contended that that provision fails the requirement of fairness imposed by the Unfair Contract Terms Act 1977. In Scripps Credit (inaudible) v. Emtra Navigation [1998] 1 Lloyds Reports 66; WRN Group Limited v. Wood [1998] CLC 189; and Barclays Bank v. Kuffner [2008] EWHC 2319, such a clause in a bank guarantee was held to be fair. But I think on the material before me it would not be right to decide finally the question of fairness under the 1977 Act.
20. Should, therefore, Master Ayers' decision that the Defendant had failed to adduce sufficient evidence of breaches of mandate or payments made in excess of authority or negligence to establish a defence that had a real prospect of success stand? In my judgment it should not, not because the Master erred, but because of new material that has come before the court on this appeal. The new material consists in the first place of copies of Barclaycard statements for MS for the period December 2002 to January 2004. These documents were adduced by the bank in response to the Defendant's assertion before the Master that the ledgers for MS's number 1 account showed inexplicable sums being paid out on MS's Barclaycard totalling £228,436.41 in just 11 months. In the bank's submission, what the Barclaycard statement showed was not that Mr Fulton was using MS's Barclaycard to pay his gambling debts, but that each director of MS had his individually numbered corporate Barclaycard.
21. The majority of the spending on the card was done not by Mr Fulton, but by the Defendant and under the payments made by Mr Fulton were paid to gambling entities. In the second place there is further evidence from the Defendant which I permitted to be adduced to the effect that, apart from the expenditure on travelling, hotels and entertainment, none of the expenditure on the card in his name was incurred by him and was therefore unauthorised. In the third place there is the statement made by Miss Stopps in the course of the hearing before me that, the entity behind Barclaycard is not an entity separate from the bank, but is the bank itself. This new material plus the witness statements before the Master is evidence that: (1) MS's finance director had a gambling problem and used IDG Group money to pay some or all of his gambling debts and; (2) over the period December 2002 to January 2004 a substantial, though unspecified sum of less than £228,436 was paid out of MS's Barclaycard account, an account administered by the bank for transactions purportedly executed by the Defendant, but not in fact executed or authorised by him. There is no evidence of any specific payment out of MS's bank account or through use of the Barclaycard to a gambling entity, let alone evidence that in excess of £211,000 of MS's money was used directly or indirectly to pay Mr Fulton's gambling debts through payments administered by the bank. Accordingly, the Defendant cannot provide any particulars worthy of the name of his allegation that MS's funds in accounts administered by the bank have been improperly used.
22. CPR 24.2 provides:

The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if –

(a) it considers that –

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

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

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

In Three Rivers District Council and Others v. Bank of England [2004] UKHL 48 at paragraph 160, Lord Hobhouse observed:

"The difficulty in the application of the criterion used by CPR Part 24 is that it requires an assessment to be made in advance of a full trial as to what the outcome of such a trial would be. The pre-trial procedures give the Claimant an opportunity to obtain additional evidence to support his case. The most obvious of these is discovery of documents, but there is also the weapon of requested particulars or interrogatories and the exchange of witness statements may provide a party with additional important material. Therefore, the courts have in the present recognised that they must have regard not only to the evidence presently available to the Plaintiffs, but also to any realistic prospect that that evidence would have been strengthened between now and the trial." (Quote unchecked)

Paragraphs 4 and 5 of the CPR 24 Practice Direction provide:

"4. Where it appears to the court possible that a claim or defence may succeed but improbable that it will do so, the court may make a conditional order as described below.

5.1 The orders the court may make on an application under Part 24 include:

... (4) a conditional order.

5.2 A conditional order is an order which requires a party to

(1) pay a sum of money into court, or

(2) to take a specified step in relation to his claim or defence as the case may be, and provides that that party's claim will be dismissed a statement of case will be struck out if he does not comply."

23. In my judgment, the Defendant has succeeded in adducing sufficient evidence and legal arguments of sufficient weight to avoid summary judgment under CPR 24, but on the material before me I think it improbable that he will establish a successful defence at trial. Accordingly, I propose to set aside the Master's order on condition that the Defendant provides security for the bank's claim. This is what I think justice requires. If such security is provided the bank will have to continue to prosecute its claim through the pre-trial process, at least to the point where it has provided the disclosure to which the Defendant is entitled. After that point, as Mr Harris accepted, the Defendant will have to plead out with particularity his defence based on Mr Fulton's defalcations and if he is unable to do so the bank will be able at that stage to apply again for summary judgment and with the benefit of the security provided by the Defendant. If, however, following disclosure the Defendant provides sufficient particulars the claim will have to go to trial.
24. In concluding that the Defendant should provide security pursuant to paragraph 4 of the Practice Direction, I bear in mind: (1) the lack of any evidence of any specific payments out of MS's money to pay directly or indirectly Mr Fulton's gambling debts; (2) the lack of any specific figure given to the Barclaycard expenditure on the Defendant's card that is said to have been incurred without his knowledge or authority; (3) the Defendant's need to show unauthorised use of MS's funds in excess of £211,000; (4) the contradictory and vague way in which the Defendant has formulated his case in the pre-hearing correspondence and in his witness statement; (5) the lack of any adequate explanation for the Defendant's apparent failure to obtain MS's books of account and/or detailed information from Mr Fulton; (6) the weakness of the Defendant's case in law.
25. The disclosure process is likely to be a long one. The Defendant will be asking for statements of all accounts held by UK and MS with the bank and also for copies of cheques and other documents that will show the destination of payments that are not shown on the statements. In the meantime the Defendant's financial position may worsen, especially given the troubled economic times which now beset us. With this in mind and taking into account the relatively low probability I think the Defendant has of establishing a successful defence, I propose to require him to bring £325,000 into court or to furnish equivalent security in some other form, such as a bank guarantee given by a first class bank. For these reasons this appeal succeeds and I will now hear counsel in respect of consequential orders.