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Henderson v. 3052772 Nova Scotia Ltd [2003] ScotCS 304 (09 December 2003)

OUTER HOUSE, COURT OF SESSION

A1127/03

OPINION OF LORD CARLOWAY

in the cause

MATTHEW PURDON HENDERSON CA (the Liquidator of LETHAM GRANGE DEVELOPMENT CO. LTD.)

Pursuer;

against

3052775 NOVA SCOTIA LTD.,

Defenders:

________________

Pursuer : Woolman QC; Simpson & Marwick WS for Yuill & Kyle, Glasgow

Defenders : Brailsford QC, Boyds

9 December 2003

1. PLEADINGS

[1] The pursuer seeks production and reduction of a disposition of heritable subjects known as the Letham Grange Country Club and Resort, Arbroath, granted by Letham Grange Development Co. Ltd. (the Company) in favour of the defenders and dated 12 February 2001. The basis for reduction stated in the closed record was restricted to a plea of gratuitous alienation by the Company to an associate within five years of winding up; later expressed under specific reference to section 242 of the Insolvency Act 1986. However, in adjustments intimated shortly before the continued hearing of the motion for summary decree on 2 December 2003 (the cause having been restored to the adjustment roll), a new plea of fraudulent preference was added.

[2] The subjects were bought by the Company in 1994 for £2,105,000. The pursuer did not dispute the defenders' contention that the Company had been able to finance the purchase as a result of a loan, or loans, totalling £2,370,910 made to the Company by various members of the family Liu or Liou (namely Shiau Cheng Tzu Liou, Jiah Jow Liou, Dong Guang (or Kuang) Liu and King Hsia Chou Liu), by the Coquihalla Development Co. Ltd. and the Sanwa Bank. Interest was due on the loan amounts at the rate of 8.4 % compound per year. Members of the Liu family became the major shareholders of the Company.

[3] The pursuer was appointed provisional liquidator of the Company on 15 November 2002, interim liquidator on 3 December 2002 and liquidator on 14 February 2003. He has continued to operate the business of the subjects which, as a going concern, is valued at about £1,800,000. Should he require to close the business, its capital value would drop by about £400,000. He is anxious to sell since the continued operation of the hotel by him is producing mounting losses. There is the existing staff of forty persons to consider as well as the creditors. There is also a danger that the fabric of the subjects will deteriorate if they are not properly maintained, especially over the winter months. However, a problem has arisen over the title. By disposition dated 12 February 2001, the Company purported to dispone the subjects to the defenders for £248,100. This followed a resolution to this effect by the board of the Company on 29 January 2001, the minute of which was signed by "D G Liu". The defenders were only incorporated on 24 January 2001. The pursuer avers that, at the time of the disposition, and after the granting of the disposition, the Company was insolvent and that the sale was at a considerable undervalue.

[4] At the time of the disposition, the managing director of the Company was Dong Guang Liu. He was also sole director, president and secretary of the defenders. The law agents engaged to carry out the conveyancing appear to have been aware that Dong Guang Liu would sign the acceptance docquet on behalf of the defenders. This docquet had been appended to the offer of sale drafted by the agents on behalf of the Company. The offer set the price of the purchase at £248,100. When sending out the contract documents by fax dated 7 February 2001, the agents advised that:

"If the transfer of Letham Grange is at a figure under its true value then such a transfer could be attacked in the future by any Liquidator of Letham Grange."

The acceptance of the offer was signed on behalf of the defenders by one J. Michael Colby, but this is simply a name used by Dong Guang Liu. Letters dated 8 and 28 February 2001, which were only produced to the pursuer in about June 2003, are also signed by Mr Colby on behalf of the defenders. The first of these confirms what is narrated as an agreement by the defenders to lease the subjects back to the Company for £129,000 per year. The second states:

"This is also to acknowledge that in addition to the purchase price, we will further assume 1,850,000 UK pound sterling of extra other debt liability of Letham Grange Development Co. Limited to the Liu Family. We will pay an 8.5% annual interest fee on the debt and it is to be repaid by February 27, 2004."

Both letters were addressed to Dong Guang Liu at the Company. They were signed by him to indicate his acceptance of their terms. The offer and acceptance letters were therefore signed by the same individual, albeit in different names for two different companies, over both of which he appears to have exercised a substantial degree of control.

[5] According to the defenders, the amount of the loan from the Coquihalla Development Co Ltd and the Sanwa Bank had originally been £200,000 but, with interest, totalled about £248,000 by the time it was due to be repaid on 25 October 2000. The Company did not have the liquidity to make the repayment on that date and therefore a restructuring of the Company was devised whereby it would sell the subjects to the defenders for the price in the disposition. However, in addition, the defenders would lease back the subjects and assume responsibility for some £1,850,000 of the debt due by the Company to the various members of the Liu family, such debt having risen to £3,128,625 or thereby. It is said by the defenders that therefore the sale of the subjects to the defenders was made for adequate consideration (viz. £2,098,000). That is their present core contention in the defence to the action. It was first pled in adjustments produced in response to the motion for summary decree which had been enrolled initially in light of the skeletal state of the defences when the record closed on 6 November 2003. Flesh had only appeared upon the skeleton on the very eve of the original diet for the hearing of the motion before Lord Emslie on 28 November 2003.

[6] The pursuer responded to these adjustments shortly before the present hearing. He points out that there is no reference in any of the Company's records to there being any restructuring of the loans from the members of the Liu family. On the contrary the material suggests otherwise, with the board minute specifying the amount ultimately included in the disposition. The disposition itself certifies that the transaction:

"does not form part of a larger transaction or of a series of transactions in respect of which the amount or value or the aggregate amount or value of the consideration exceeds five hundred thousand pounds."

Stamp duty was paid on the basis of the amount specified in the disposition. The files of the law agents make no mention of a loan restructuring. There is no documentation from the Liu family consenting to any transfer of the loan to the defenders or from the Company confirming a reduction of indebtedness to the family. In the latest accounts of the Company, signed on 29 January 2002, albeit for the year ending 31 October 1999, no mention of any potential future restructuring of the Company's debt is made. Four members of the family, including Dong Kuang (Guang) Liu, had lodged claims as creditors in the liquidation, but none of the schedules to their Statements of Claim contained any reference to the reduction of the indebtedness as a result of the disposition. The claims had been presented at a creditors meeting on 14 February 2003, reinforced by the contents of a Note lodged in the liquidation process at Glasgow Sheriff Court and not changed to reflect the defenders' current contention until 25 June 2003. The pursuer had requested information about the transfer of the indebtedness by letter to the defenders dated 22 January 2003 but, until at least 25 June, the Liu family's law agents had continued to represent in the liquidation process that the whole amounts of the capital and interest of the original loans remained extant.

2. SUBMISSIONS

[7] In moving the motion for summary decree, the pursuer produced a written note of the submission which was then made orally at the bar. This contained an alternative whereby the court might order the production of certain financial and other records of the defenders together with correspondence and other documentation passing between the Company and the defenders. The defenders confirmed in limine that the facts contained in paragraphs 3.1, 3.2, 3.3, 4.2, 4.7, 5.1, the first and last sentences of paragraph 5.2, paragraphs 6.1, 6.2, 6.3, and 6.4 of the note of submission, which have largely already been rehearsed above, were correct. They also confirmed that they were not in a position to challenge the contents of paragraphs 4.1, 4.3, 4.5, 4.6 or the remaining elements of paragraph 5.2, albeit that they had not seen the relevant documentation. The defenders did maintain that the claims in the liquidation had been made by the Liu family's law agents contrary to their instructions. In summary, the defenders accepted the pursuer's numbered propositions 8.2.1, 2, 3, 4 and 7 that, if the defenders' current position were correct, then: there had been a misrepresentation of the true identity of the defenders' officers to the Registrar of Companies in Nova Scotia; the missive in respect of the conveyance had been signed by a fictitious person; the disposition contained a material misrepresentation regarding the consideration; that misrepresentation had also been made in the Sheriff Court case until June 2003; and, finally, there had been a significant underpayment of stamp duty. The defenders were also not in a position to dispute that the law agents acting in the conveyancing must have been unaware of any larger transaction

[8] The pursuer accepted that he had to demonstrate "near certainty" of success before he could secure summary decree (P & M Sinclair v The Bamber Gray Partnership 1987 SC 203, per Lord Prosser at 206), the Court being concerned to discover whether a defence was disclosed (Keppie v The Marshall Food Group 1997 SLT 305 per Lord Hamilton at 308). The defenders agreed that this was so. In relation to the substantive law, the pursuer contended that, in terms of sub-section 242(4) of the Insolvency Act 1986 (c 45), he was entitled to reduction unless the defenders could establish solvency at or after the alienation or that the alienation was made for adequate consideration. Again, this was accepted by the defenders.

[9] So far as the adequacy of the consideration was concerned, the pursuer pointed out that there was not a single contemporaneous document, unless the letter of 28 February 2001 was one, to suggest that the transaction involved the restructuring of the loans from the Liu family. The documents all pointed unequivocally in the other direction, i.e. that the subjects were sold for £248,100, having been bought in 1994 for over £2,000,000 and being currently valued at £1,800,000. In relation to solvency, the onus was on the defenders but all the accounts from 1994 to 1999 showed that its liabilities exceeded its assets. Given that the subjects were its principal asset, their alienation must have resulted in insolvency after the transaction took place. It was observed that the auditors to the 1999 accounts had been unable to form a view on whether the accounts gave a true and fair view of the Company's affairs because the Company had not kept proper records in relation to a number of matters. The accountants asked to audit the 2000 accounts had resigned because they did not consider that they had sufficient information from the Company. The pursuer did not press the fraudulent preference plea at this stage given the need on the pursuer's part to prove intent.

[10] The defenders contended that, notwithstanding the various irregularities in the disposition, payment of stamp duty, company records and Nova Scotia company register details, all that the pursuer could show was a cloud of suspicion hanging over the defenders' averment that the disposition of the subjects was part of a larger transaction which involved adequate consideration. Such a cloud was not sufficient to merit summary decree because the court could not be satisfied, by the mere existence of suspicion, that there was no defence to the action disclosed. The defenders did not oppose the alternative motion for further vouching of the defenders' position.

3. DECISION

[11] Rule of Court 21.2.(4) provides that the court may:

"(a) if satisfied that there is no defence to the action disclosed...grant the motion for summary decree..."

As was observed by Lord Hamilton in Keppie v The Marshall Food Group (supra at 308), appropriate caution is required before granting such a motion because it involves determining the case without further inquiry into the facts. He remarked:

"It is clear that the court is entitled to look to material beyond any pleadings and is concerned with the authenticity of the defence...The court, while being astute to repel purely dilatory defences, should not summarily preclude inquiry where it appears that there is a genuine issue to try."

Approaching the case with that caution and dicta in mind, I am satisfied from the material available that, whilst the defenders have belatedly made vague averments about the restructuring of the loans as added consideration beyond the sum specified in the disposition, there is no defence to the pursuer's case disclosed. Such defence as is averred is not an authentic one and there is no genuine issue to try. The defences are aptly described as dilatory.

[12] A number of factors have driven me to the conclusion reached. First, a slight speciality in this case is that it is accepted that the alienation of the subjects falls within the ambit of section 242 of the 1986 Act, the disposition having been granted within the relevant period. The pursuer is entitled to decree therefore unless the defenders can demonstrate solvency immediately or sometime after the disposition or that adequate consideration was given for the subjects.

[13] Secondly, looking at the first of their potential defences, although the defenders do aver that they have been unable to enquire into the solvency of the Company because of lack of access to records, they do not aver or plead that the Company was solvent at any relevant time. That is not at all surprising. Assuming the absence of adequate consideration at the material time (that is to say on the hypothesis that there was no assignation of debt), it is inconceivable that the Company could have been solvent after disposing in early 2001 of its major asset for not much more than an eighth of its value, especially in circumstances where its last accounts (to October 1999) and all previous accounts show that its liabilities exceeded its assets in any event. Given that the defenders' instructions appear to come from Dong Guang Liu, albeit perhaps in his guise as J Michael Colby, if it was thought that solvency at a material time was capable of being established, then this would have been known to Dong Guang Liu as the Company's managing director and would have appeared in the pleadings as a defence. It is not and therefore I do not consider it further.

[14] Thirdly, there is the question of adequate consideration. This is the only defence averred. The supporting averments of fact, other than the assertion of adequacy and perhaps also a passing reference (and it is only that) to the letter of 28 February 2001, essentially consist of one sentence as follows :

"The affairs of [the] Company were thus restructured by the sale of its assets to the defenders in return for the payment of the cash sums condescended upon and the assumption by the defenders of £1.85 million of the total Liu family debt (which debt at that stage amounted in total to £3,128,625 or thereby), and a leaseback of the premises to the defenders at a rent of £129,000 a year."

Although brevity in pleading is seldom to be discouraged, and I hasten to add that I make no criticism at all of the pleader here, it is important to note that the defenders are unable to point to any occasion at which the assignation of debt was agreed to by the relevant members of the Liu family or, indeed, by the Company. There is no documentation vouching the existence of an agreement that the loans be assigned other than the reference in the letter of 28 February, which was apparently produced as late as June 1993. This letter was signed by Dong Guang Liu as J Michael Colby and purports to be sent to himself! If this letter is capable of binding the defenders, there is no indication that its terms, in so far as relating to the assignation of the loans, were ever implemented nor is it clear that, in any event, they could be binding on the Liu family.

[15] Fourthly, but still in connection with the adequacy of consideration, the undisputed documentation in the case discloses that the consideration was not adequate. The terms of the disposition itself, presumably signed by Dong Guang Liu or on his instructions, reveal the inadequacy and that in the face of a prior specific warning from law agents about the need for adequacy. Furthermore it certifies specifically that what it contains is not part of a larger transaction. The minutes of the meeting of the board of the Company signed by "DG Liu" specify that the resolution was to sell the subjects for the sum in the disposition, i.e. at a substantial undervalue, and without reference to any larger transaction involving the transfer of the Company's indebtedness. There is a total absence of any reference in the Company's records to the restructuring and this points firmly towards the inevitable conclusion that no such restructuring was ever proposed or took place.

[16] It is perhaps worth observing that the present motion was made after the closing of the record in an action which commenced in April 2003. The hearing was after the requisite period of notice and after the defenders had been afforded an extra opportunity to expand skeletal defences by the restoration of the cause to the adjustment roll. These matters may not be directly relevant to the determination of the motion, but they do make it clear that the defenders have had ample time to state their position with sufficient clarity for the Court to decide whether an authentic defence is disclosed. It is also perhaps worth remarking, even if it may again be somewhat peripheral to the issue, that the fate of the subjects is a matter which needs to be determined with some urgency. In so far as the Rule of Court is intended to thwart attempts by defenders to delay unanswerable claims (per Lord Prosser in P & M Sinclair v Bamber Gray (supra) at 207), then I consider that its use in this case is entirely justified given that I am satisfied that the pursuer is certain to succeed in his contention.

[17] I shall accordingly grant the motion for Summary Decree by repelling the defenders' second and third pleas-in-law, sustaining the pursuer's first plea in law and order production of the disposition. Once production has been satisfied, I will reduce the disposition in terms of the first conclusion.