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Cite as: [2004] ScotCS 98
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Henderson (Liquidator of Letham Grange Development Co Ltd) v. 3052775 Nova Scotia Ltd [2004] ScotCS 98 (21 April 2004)
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OUTER HOUSE, COURT OF SESSION |
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A1127/03
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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
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Pursuer: Woolman QC; Simpson & Marwick WS for Yuill & Kyle, Glasgow
Defenders: Brailsford QC, Sandison; Boyds
21 April 2004
1. BACKGROUND
[1] On 2 December 2003 the pursuer moved for summary decree of production and reduction of a pretended disposition granted by Letham Grange Development Co. Ltd. (the Company) in favour of the defenders dated 12 February 2001 in respect of the subjects known as the Letham Grange Country Club and Resort, Arbroath. On 9 December, that motion was granted for the reasons detailed in the Opinion of the same date. The terms of that Opinion remain relevant only in so far as they set out the pleadings of the parties in the first section (paragraphs [1] to [6]), albeit that there have now been changes to the pleadings (infra). The interlocutor of 9 December repelled the defenders' first (relevancy) and second (facts) pleas-in-law and sustained the pursuer's first plea-in-law, which is to the effect that the disposition was a gratuitous alienation in terms of section 242 of the Insolvency Act 1986 (c 45). The defenders were appointed to produce the disposition as a precursor to reduction, the document then in process [6/1 of process] being only a photocopy of an unsigned version. On 6 January 2004, leave to reclaim against that decision was granted but, meantime, the defenders were ordained to lodge all their financial statements, minutes of meetings and correspondence with the Company showing: (a) that the sum of £248,100 stipulated in the disposition was paid by the defenders; (b) the date of that payment; and (c) the transfer to the defenders of £1.85 million of debt due by the Company to the Liu family. While the cause was pending before the Inner House, the defenders lodged a Minute of Amendment expanding upon their defences. The pleadings in their amended form are reproduced in a supplementary appendix as a draft closed record dated March 2004. On 17 March 2004, as a result of the amendments, the Inner House recalled the summary decree and remitted the cause to the Outer House for a further hearing in light of the amended pleadings. Such a remit, in terms of Rule of Court 38.21.(2), presupposes that the amendments make a material change to the pleadings. The hearing took place on 26 March. It was agreed by the parties that the defenders should make their submissions first, standing the previous grant of decree.
2. SUBMISSIONS
(a) Defenders
[2] The defenders submitted that, on the basis of the amended pleadings, there was a genuine dispute of fact, which could only be resolved after a proof. In that regard, since the record had now closed (18 December 2003), a proof before answer could be allowed. The defenders' fundamental position had not changed; namely that there had been adequate consideration granted for the disposition in the form of the cash amount specified together with a transfer of £1.85 million of Company debt, which was owed to the Liu family, from the Company to the defenders. The pursuer's contention, that this position should be rejected as not credible or reliable, was now challenged in the amended pleadings. The pursuer's six bullet points (infra and draft record pp 7-8) were dealt with by eight responses (draft record pp 12-15), each based on new documents produced. First, there is a Memorandum dated 2 December 1994 [7/12] confirming the breakdown of the original loans of £2,370,910 to the Company. This also states that the Liu family amounts are to be repaid by 25 October 2004 and a sum loaned by the Coquihalla Development Co. Ltd by 25 October 2000. Secondly, there are a number of letters [7/7-10] from the Company dated 5 December 1994 confirming the loans to the Liu family members. Thirdly, there is a similar letter [7/11] dated 8 December 1994 to Coquihalla. Fourthly, there is a copy of a resolution [7/14] of the defenders dated 7 February 2001 stating that they would assume the £1.85 million of Liu family debt due to the Company, to be repaid in three years. Fifthly, there is a letter [7/16] from the defenders to the Company, dated 28 February 2001, acknowledging that the defenders are to assume that amount of debt. Sixthly, there is an affidavit [7/17] sworn on 26 June 2003 by Lee Fon Yi, president of the defenders, certifying that the defenders had assumed the £1.85 million of debt. Seventhly, there are affidavits [7/18-21] from various members of the Liu family confirming the transfer of indebtedness. Eighthly, there are the defenders' financial statements [7/3-4] which make reference to the transferred debt in "note 4". Although it was accepted that there were questions which might be asked at a proof concerning the credibility and reliability of the some of the content of the various documents, the test for summary decree had not been met in view of that content. The defenders had proffered on record an explanation for the discrepancy between the factual position and the terms of the Company's board minute, the Disposition and related documentation. This was that, by the time of the disposition, the defenders had agreed to assume the debt and that Dong Guang Liu (the person effectively in control of both the Company and the defenders) had:
"...indicated in discussions with [the law agents] that he also intended to arrange for an assumption of debt by the defenders to take place as part of the transaction. He was unaware of the terms of the Disposition at or around the time of its grant, and was indeed entirely unfamiliar with any of the technical requirements of Scots law in regard to the transfer of title to heritable property. He was unaware that the Disposition properly required to record anything more than the cash part of the consideration for the transfer in question, or that stamp duty required to be paid on more than the cash part of that consideration. He simply paid to [the law agents] the amount...of stamp duty which they asked for from him."
The pursuer had rejected the claims of the Liu family because he was aware of their present contentions relative to the transfer of the debt. In all these circumstances, the motion for summary decree should be refused.
(b) Pursuer
[3] The pursuer maintained that the new documents and averments did not materially alter the position, as it existed at the time of the hearing of the previous motion. The defenders had not produced any documents, in terms of the interlocutor ordaining them to do so, which provided any independent confirmation of the transfer of indebtedness. Even the defenders' financial statements were the subject of a caveat from their accountants. In the absence of independent support for the defenders' position, reliance should not be placed upon it. The pursuer had highlighted six points in his pleadings [draft record pp 7-8] outlining why the defenders' position should not be accepted, all under reference to the documentation produced. First, the minute of the Company board meeting dated 29 January 2001 [6/8] and the signed disposition [6/10] both narrated the consideration as £248,100, with the disposition certifying that the sale did not form part of a larger transaction etc. the value of which exceeded £500,000. Secondly, the files of the solicitors who acted for both the Company and the defenders made no mention of a loan transaction. There were no contemporaneous documents from the Liu family agreeing to the transfer of the debt or from the Company confirming a reduction of its indebtedness. Thirdly, stamp duty of £2,485 (i.e. 1%) had been paid on the basis of the consideration specified in the disposition. Fourthly, the Company's accounts for the year ending 31 October 1999 [6/12], signed by Dong Guang Liu on 29 January 2002, make no reference to the repayment of the Liu family loans as a post balance sheet event, as would have been required in terms of United Kingdom accounting standards. No accounts for the years 2000 or 2001 had been lodged. Fifthly, at a creditors' meeting in February 2003, four member of the Liu family had made claims [6/17-18] in respect of their loans to the Company and none of the schedules showing repayments of their loans made reference to any transfer of debt to the defenders. Sixthly, in about March 2003, a Note [6/19] was lodged by Liu family members in the liquidation process in Glasgow Sheriff Court averring that they were due repayment of their loans to the Company. In these circumstances, there was no authentic defence nor was there a genuine issue to try. The motion should again be granted, failing which a proof before answer should be allowed.
3. DECISION
[4] As noted in the original Opinion:
"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 1997 SLT 305 (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.' "
A pursuer must be in a position to demonstrate "near certainty" of success (P & M Sinclair v The Bamber Gray Partnership 1987 SC 203, per Lord Prosser at 206). The present case must, of course, be approached with the caution and dicta of Lord Hamilton kept firmly in mind. Furthermore, since the case has been remitted by the Inner House, an entirely new outlook must be applied to the material now available and any view reached must be uninfluenced by any previous thoughts upon different pleadings and material. Advancing in that fashion, I am satisfied that there is no defence to the pursuer's case. Such defence as is averred and vouched is not an authentic one and there is no genuine issue to try. The defence is dilatory and summary decree is appropriate.
[5] It is important to observe that a speciality in this case remains that, since it is not disputed that sub-sections 242(2) and (3) of the Insolvency Act 1986 apply to the disposition, the pursuer is entitled to reduction unless the defenders can establish solvency at or after the alienation or that the alienation was made for adequate consideration (sub-section 242(4)). No solvency question is raised in the current motion and the only issue is whether the defenders have put forward some form of colourable case of adequacy of consideration, no matter how improbable or even incredible that case might appear on paper. Have the defenders disclosed a defence such that there is a genuine issue to try? The answer to that question is in the negative.[6] The starting point chronologically is the minute of the Company [6/8] dated 29 January 2001. This is signed by Dong Guang Liu as chairman. He is recorded as the only person present at the relevant meeting. It is a very short minute and reads:
"The Board considered a proposal to sell all the land and buildings of Letham Grange Development Co. Ltd.... for the sum of Two Hundred and Forty Eight Thousand one Hundred Pounds Sterling to [the defenders]...
The Company...agreed that is was in the best interests of the Company to sell all the assets mentioned above to [the defenders] and in return obtain a lease of the subjects on terms to be agreed."
There is no reference to any transfer of debt as a consideration. The missive [6/7] dated 7 February 2001, which was prepared on behalf of the Company and addressed to the defenders, specifies a price of £248,100 and provides that, in exchange for that price, a disposition will be executed and delivered. This missive was docquetted as accepted on behalf of the defenders by Dong Guang Liu in his Canadian persona of "J Michael Colby". The acceptance followed upon the missive being faxed to Dong Guang Liu under cover of a message [6/11] from the Company's law agents also dated 7 February. A copy of the proposed disposition was faxed with the message. The message specifically refers to the need for a transfer of:
"£2,485 representing stamp duty at 1 % on the purchase price."
It also warned :
"1. 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.
2. In the event of the transfer of the land being at under value then it is possible that this could be treated as an unlawful distribution under UK company law...the transfer itself could be rendered void."
The message makes a number of detailed points about arranging payment of the price and putting a lease into place. Nowhere does it make any reference to any restructuring of the Company's debts or to there being any consideration over and above the cash amount specified. The resultant formal disposition [6/10], dated 12 February, signed by the Company's law agents as its Secretaries on Dong Guang Liu's instructions, reflects the terms of the missive in relation to price and in particular states that the Company:
"certify that the transaction hereby effected 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 two hundred and fifty thousand pounds"
In the passage from the defenders' amended pleadings quoted above, it is said that the defenders had agreed to assume the debt by the time of the Disposition and that Dong Guang Liu had mentioned this to his law agents but had been ignorant of the niceties of Scots conveyancing and United Kingdom stamp duty. An affidavit from the defenders' current law agent [7/22] makes reference to certain recent remarks made by the law agent who acted for the Company at the time, but there is no affidavit from that law agent supporting the proposition that he was told about any assumption of debt by the defenders and, in particular, that such an assumption was to be part of the consideration for the sale of the land. Indeed, if the law agent had been so advised, he could hardly have signed the disposition, which he did, without committing a serious breach of ethical and legal rules. In this regard, it was not disputed that the files of the law agents acting for the Company at the material time had no contemporaneous references to any debt restructuring or transfer. From the content of the Company's 1999 accounts, signed in the following January, it would appear that the Company's accountants were also unaware of such a restructuring process.
[7] Contrary to what is hinted at in what are evidently carefully drawn pleadings, it appears from the faxed message [6/11] that Dong Guang Liu had a copy of the disposition before it was signed. From the detailed remarks made by his law agent in the faxed message, Dong Guang Liu could have been in no doubt at all that what was being processed was an ostensible sale of the subjects at the price specified and none other and that Stamp Duty was payable on the price involved; in whatever form that price took.[8] The defenders' amended pleadings do not fundamentally alter their position at the time of the original motion for decree. The various documents from 1994 have little bearing on the issue since it is not disputed that there were loans generated at that time from the Liu family and the Coquihalla company. The defenders' pleadings are now expanded and vouched by reference to a series of affidavits from the Liu family, including Dong Guang Liu. However, it is of particular significance that the averred transfer of debt from the Company to the defenders remains unsupported by any contemporaneous document from either the Company or the Liu family. The only document which could conceivably be regarded as an exception to this is the letter of 28 February 2001 [6/3] from the defenders (signed "J Michael Colby"), the terms of which were accepted by the Company (signed "Dong Guang Liu"). However, that document, which states that the defenders will assume £1.85 million of debt, post-dates even the disposition by over two weeks. The earlier letter of 8 February [6/2] makes no mention of debt transfer as part of the consideration.
[9] So far as the affidavits are concerned, there is nothing of significance in that from Lee Fon Yi given that it is not suggested that he had any involvement in the relevant events at the material time; the purported resolution by the defenders [7/14] dated 7 February having been made and signed by "J Michael Colby" as sole director. The affidavit from Dong Guang Liu [7/18] asserts, in paragraph 6, that the consideration for the sale involved the repayment of the Liu family loans and refers to his securing the agreement of his family to this. There is no detail of when or how this was done. Indeed, from paragraph 11, it would appear that he may be saying that the assumption of the Liu family loans by the defenders was not done at the time of the sale of the subjects at all but some time afterwards. The remaining Liu family affidavits all assert that there was agreement concerning the transfer of the indebtedness. Again, all are vague on when and how that was actually achieved. They point to no contemporaneous documentation to evidence such a significant transaction. They must also be looked at against the background of the terms of the previously also signed but now contradicted claims made in the liquidation [7/17 et seq]. In short, I do not consider that the affidavits and other material produced support the proposition that part of the consideration at the time of the disposition included a transfer of the indebtedness.
[10] Nowhere is there any material, called for in the interlocutor of 6 January, to demonstrate even that the consideration mentioned in the disposition was paid. There seems to be no primary material either to suggest that the supposed transfer of indebtedness did take place or that subsequently, in implement of the transaction, the defenders commenced payments to the Liu family members of the "8.5% annual interest fee on the debt", which was in any event to have been repaid by February 2004 [7/16]. In that regard, I do not consider that the qualified financial statements of the defenders, being relatively recent in origin, reveal anything significant other than that they reflect the current contention of the defenders notably in relation to a transfer of indebtedness.
[11] As I observed in the original Opinion, 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 that the disposition is struck at by the statutory provisions and falls to be reduced. I shall accordingly grant the motion for summary decree by repelling the defenders' second and third pleas-in-law and sustaining the pursuer's first plea-in-law. Since a photocopy of the signed disposition is now available [6/10], I will hold production satisfied accordingly and grant decree of reduction in terms of the first conclusion.