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Matthew Purdon Henderson v. 3052775 Nova Scotia Ltd [2005] ScotCS CSIH_20 (18 February 2005)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord MacLean

Lord Philip

Lord Hardie

[2005CSIH20]

A/1127/03

OPINION OF THE COURT

delivered by LORD HARDIE

RECLAIMING MOTION

in the cause

MATTHEW PURDON HENDERSON

Pursuer and Respondent;

against

3052775 NOVA SCOTIA LIMITED

Defenders and Reclaimers:

_______

Act: Woolman, Q.C.; Simpson & Marwick, W.S. (for Yuill & Kyle, Glasgow) (Pursuer and Respondent)

Alt: Sandison; Boyds (Defenders and Reclaimers)

18 February 2005

[1] This is an action of production and reduction of a pretended disposition granted by Letham Grange Development Company Limited (hereinafter referred to as "the company") in favour of the defenders dated 12 February 2001 and recorded in the General Register of Sasines for the County of Angus under Title No. ANG11868 in respect of the Letham Grange Country Club and Resort, Arbroath (hereinafter referred to as "the subjects"). The pursuer sues in his capacity as Liquidator of the company.

[2] On 2 December 2003 the pursuer moved for summary decree of production and reduction of the said pretended disposition. On 9 December 2003 the Lord Ordinary granted that motion by sustaining the pursuer's first plea in law to the effect that the disposition was a gratuitous alienation in terms of section 242 of the Insolvency Act 1986. On 6 January 2004 leave to reclaim against that interlocutor was granted and while the cause was pending before the Inner House the defenders lodged a minute of amendment expanding upon their defences. On 17 March 2004, as a result of the amendments, the Inner House recalled the summary decree and remitted the cause to the Lord Ordinary for a further hearing in light of the amended pleadings. After a further hearing the Lord Ordinary again pronounced summary decree on 21 April 2004 by repelling the defenders' second and third pleas in law and sustaining the pursuer's first plea in law. The defenders reclaimed against that decision.

[3] Counsel for the defenders submitted that in applications for summary decree in terms of Rule of Court 21.2 the court should take a relatively broad view of the prospects of successfully defending the action. In the present case the issue for the court was whether the averments of the defenders and the documents lodged as productions disclosed a case to be tried on the single issue of whether the grant of the disposition by the company had or had not been made for adequate consideration. Counsel for the defenders further submitted that the test to be applied by the court was a stringent one and that, before summary decree could be granted, there had to be near certainty that the defenders would fail. He accepted that it was legitimate for the court to look behind the terms of the disputed disposition and to consider the terms of the various documents lodged as productions as well as the terms of the defences. It was also accepted on behalf of the defenders that, if the court concluded on an analysis of the various documents that the consideration was truly £248,100, such consideration was inadequate and the Lord Ordinary was correct in his decision to grant summary decree. On the other hand, if the consideration included the assumption by the defenders of £1.85m of debts due by the company to third parties, there was an issue to try and the Lord Ordinary had erred. Counsel for the defenders further conceded that the defenders had the onus of proving that the consideration included the £1.85m of debts in addition to the stated consideration in the disposition. The following authorities were cited: P. & M. Sinclair v. The Bamber Gray Partnership 1987 S.C. 203; Keppie v. The Marshall Food Group Ltd. 1997 S.L.T. 305; Three Rivers D.C. v. Bank of England (No. 3) (2003) 2 AC 1 and Nottay's Trustee v. Nottay 2002 S.L.T. 769.

[4] In response counsel for the pursuer did not dispute that the court should proceed with caution before granting summary decree. However, he submitted that, having regard to the averments and productions, the Lord Ordinary was correct to conclude that there was no genuine or authentic defence to the action. This was not a highly complex case involving consideration of the mindset of individuals (cf. Three Rivers D.C. v. Bank of England). Rather, all of the contemporaneous documents were unequivocal. Subsequent events, including company accounts and claims in the liquidation by creditors whose debts were allegedly transferred as part of the consideration, pointed to the lack of authenticity of the defences.

[5] We recognise that in determining applications for summary decree in terms of R.C. 21.2 the court must proceed with caution and must achieve "the near certainty as to an absence of a defence which would justify granting summary decree" mentioned by Lord Prosser in P. & M. Sinclair v. Bamber Gray at page 206. We agree with the observations of Lord Hamilton in Keppie v. The Marshall Food Group Ltd. at page 308 that in such applications the "court requires to consider the state of the action as it stands" and that the "court is not concerned with forecasting the outcome of a proof". We also agree with Lord Hamilton's observation that "the court is entitled to look to material beyond any pleading and is concerned with the authenticity of the defence."

[6] Before considering the terms of the various documents it is important to recognise certain special features in this case. The first relates to the various different names used by the Managing Director of the company at the relevant time. It is admitted in Answer 4 that at the date of the purported disposition the Managing Director of the company was Dong Guang Liu. It is also admitted that he was also known as "Liu Tong Guang", "Tong Kuang Liu", "Toh Ko Liu", "Peter Liu" and "J. Michael Colby" although it is explained that the first two aliases are alternative renderings in English of his name, the third alias is a rendering of his name favoured by native Japanese speakers and the adoption of the name "Peter Liu" is attributable to the common practice amongst the Cantonese community in the west of adopting a western forename. His alias "J. Michael Colby" was an attempt to avoid prejudice and discrimination in the west. The other feature of this case is that the same individual was the Director, President and Secretary of the defenders at the relevant time. 7/1 of process is a file relating to the defenders, which discloses that the sole shareholder of the defenders as at 25 January 2001 was Kuan Liang Investment Holding Co. Ltd. On that date Kuan Liang Investment Holding Co. Ltd. resolved that Mr. Dong Guang Liu should resign as Director, Secretary and President of the defenders with immediate effect, that Mr. J. Michael Colby would become Director, Secretary and President of the defenders with immediate effect and that Mr. Dong Guang Liu had authority to negotiate and act on behalf of the defenders whenever he saw fit.

[7] It appears to us that in considering the various documents the starting point is the minute of the resolution of the sole Director of the defenders dated 26 January 2001 which is contained within the file (7/1 of process). The resolution is in the following terms:

"BE IT RESOLVED THAT:

The company will purchase the assets of Letham Grange Development Co. Ltd. in Angus, Scotland - inclusive of the golf courses, restaurants, curling rink and related businesses on the grounds, and buildings for 248,100 pounds sterling.

This resolution is a resolution in writing signed by the sole director of the company pursuant to Section 91(1) of the Companies Act."

It is signed by J. Michael Colby as the sole director.

[8] The second document of significance at or about that time is the minute of the Board Meeting of the company held at Arbroath on 29 January 2001 (6/9/2 of process). That minute discloses that D.G. Liu was the only person present and he has signed the minute as Chairman of the meeting. The minute is inter alia in the following terms:

"The Board considered a proposal to sell all the land and buildings of Letham Grange Development Co. Ltd. by Arbroath for the sum of Two Hundred and Forty Eight Thousand One Hundred Pounds Sterling to 3052775 Nova Scotia Limited ...

The Company having considered the proposal agreed that it was in the best interests of the Company to sell all the assets mentioned above to 3052775 Nova Scotia Limited and in return to obtain a lease of the subjects on terms to be agreed".

These resolutions were followed by a facsimile message dated 7 February 2001 from MacRoberts, the company's solicitors, to Dong Guang Liu (6/9/5 or process). That message referred to a telephone conversation on the previous day between Dong Guang Liu and Mr. Gardner, the solicitor acting on behalf of the company and the defenders. It encloses three documents relating to the agreement to sell the subjects at a price of £248,100 with a date of entry of 29 January 2001, namely (i) an offer reflecting the agreement (6/9/3 of process), (ii) a Board Minute of the company for signature by Mr. Liu narrating the sale of the subjects and authorising MacRoberts as company secretaries to sign the conveyance and (iii) a draft disposition. Apart from asking Dong Guang Liu to sign the acceptance of the offer on behalf of the defenders if its terms were acceptable, the facsimile message also raised a number of issues, including the consequences if the transfer was at a figure under the true value of the property and advising that arrangements would require to be made for the price to be paid by the defenders to the company. The offer to sell the heritable property stipulates that the price will be £248,100 and that the date of entry will be 29 January 2001, notwithstanding the date of the offer. The offer was accepted on behalf of the defenders by J. Michael Colby signing as director. The date of acceptance is simply recorded as February 2001. The disposition was signed on behalf of the company by MacRoberts as company secretaries on 12 February 2001. It discloses that the consideration was £248,100 on which stamp duty of £2,485 is recorded as having been paid. The facsimile message referred to the rate of stamp duty being 1% of the purchase price and to the need for Dong Guang Liu to send a telegraphic transfer of £2,485 representing the stamp duty to MacRoberts to enable them to register the disposition.

[9] From a review of the contemporaneous documents mentioned above it is clear to us that the defenders and the company each resolved that the purchase price of the subjects would be £248,100. These resolutions were minuted and were reflected in telephone instructions to MacRoberts which were recorded in the facsimile message. In that message the price was again recorded as £248,100, which price was reflected in the terms of the missives accepted on behalf of the defenders by their sole director. In addition the facsimile message advised Dong Guang Liu, whom we have noted is the same person as J. Michael Colby, of the rate of stamp duty payable before a disposition could be registered and requested from him the sum of £2,485 representing the stamp duty payable on a purchase price of £248,100. The contemporaneous documents culminated in the signature of the disposition on 12 October 2001. The evidence based upon such documents that the consideration for the transfer of the heritable property from the company to the defenders was £248,100 appears to us to be incontrovertible.

[10] The defenders maintain that, notwithstanding the terms of the contemporaneous documents, the true consideration for the sale of the subjects to the defenders involved the assumption by the defenders of £1.85m of debt due by the company to the Liu family in addition to the payment of the price specified in the missives. In support of that case we were invited to consider several documents which had been lodged in process. In the construction of these documents, the issue would appear to be whether they support the defenders' averments in Answer 4 that prior to the grant of the disposition they had agreed to assume liability for the debt as part of the consideration for the subjects and that by that time Dong Guang Liu had advised MacRoberts of that fact. Thus the relevant date is 12 February 2001, being the date on which the disposition was signed on behalf of the company by MacRoberts.

[11] In the documents lodged in process the first reference to the defenders assuming the said debt appears in a resolution of the defenders dated 7 February 2001 contained within the file (7/1 of process). That resolution was in the following terms:

"BE IT RESOLVED THAT:

1. The company will further assume 1,850,000 pound (sic) sterling of extra other debt liability of Letham Grange Development Co. Limited to the Liu Family. We will pay an 8.5% annual interest rate on the debt and it is to be repaid in three years.

2. The company is in agreement for Letham Grange Development Co. Ltd. of Angus, Scotland to lease and continue in the running of the golf courses, restaurants, curling rink and related businesses on the grounds, and buildings owned by 3052775 Nova Scotia Ltd. in Angus, Scotland.

3. The yearly lease rate will be 129,000 pounds sterling for the grounds and buildings net, net, net (sic). Letham Grange Development Co. Ltd. will be responsible for all expenses, taxes and all upkeep that is related with the businesses, grounds and the properties. The lease will be for a period of one year and can be renewed, subject to mutual consent.

This resolution is a resolution in writing signed by the sole director of the company pursuant to Section 91(1) of the Companies Act."

It is signed by J. Michael Colby.

[12] Although this resolution is prior to the relevant date, the first thing to observe is that it makes no reference to the earlier resolution dated 26 January 2001 in which the defenders resolved to purchase the heritable property for £248,100. Nor does it suggest that the assumption of the debt by the defenders is conditional upon the transfer to them of the heritable property. We consider these to be significant omissions. The omission by the defenders to seek the written agreement of the company to this debt transfer before the relevant date is also of note. These omissions are all the more significant when contrasted with the action taken by the defenders in respect of that part of the resolution relating to the lease of the subjects to the company at a rent of £129,000. The resolution was followed by a letter dated 8 February 2001 from the defenders to the company addressed to Mr. Dong Guang Liu (6/9 of process). In that letter reference is made to the offer to lease the subjects to the company at an annual rent of £129,000. That offer was accepted on behalf of the company by Mr. Dong Guang Liu by his countersigning a copy of the letter. If it had been intended to link the assumption by the defenders of any of the company's debts to the purchase of the subjects, we would have expected a letter to be written to the company at or about the same time as the letter dated 8 February to enable the company to confirm that it agreed to such a proposal. In the event, no such letter was written by the defenders to the company until 28 February 2001. This letter is also addressed to Mr. Dong Guang Liu and is 6/3 of process. It is in the following terms:

"This is to confirm that we have purchased all the assets of Letham Grange Development Co. Limited - inclusive of the golf courses, restaurants, curling rink, and related businesses on the grounds, and buildings.

This is also to acknowledge that in addition to the purchase price, we will further assume 1,850,000 U.K. pound (sic) 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.

Please sign at the bottom for your acceptance of the above."

The letter is signed by J. Michael Colby. At the bottom of the letter there is a typed docquet indicating an acceptance on behalf of the company by Dong Guang Liu and above that there is his signature. This is the first evidence of an acceptance by the company of an arrangement whereby the defenders will assume liability for the company's debt allegedly due to the Liu family. Moreover, we note that the first paragraph of this letter confirms that the defenders have already purchased the subjects whereas in the second paragraph the defenders express a willingness to assume liability for the Liu family debt if the company accepts such an arrangement. Thus the assumption of the debt is a future event unconnected with the purchase of the subjects and is contingent upon the agreement of the company. It seems to us that the resolution of the defenders and the correspondence relating to the assumption by the defenders of the debt allegedly due by the company to the Liu family, do not support the contention that the assumption of the debt was part of the consideration for the sale of the subjects. On the contrary, the documents disclose that these were separate transactions, separated in time and treated separately by the defenders. There was no attempt to link the two transactions either in the resolutions of the defenders or in the correspondence prior to the relevant date passing between the defenders and the company in which the defenders sought the approval of the company for particular parts of their proposed arrangements. The fact that the letter dated 28 February 2001 was written by an individual after he was aware that the disposition had been signed on behalf of the company, as well as the use of the past tense in the first paragraph and the future tense in the second paragraph of that letter, point to the inevitable conclusion that any agreement for the transfer of debt from the company to the defenders was not part of the consideration for the purchase of the subjects. As was observed by the Lord Ordinary the letter dated 28 February 2001 stating the intention to assume responsibility for the debt and inviting the company's acceptance of such an arrangement post dated the disposition by more than two weeks.

[13] The other documents upon which the defenders rely are various affidavits. The first is an affidavit by Lee Fon Yi, President and Director of the defenders (7/16 of process). In his affidavit Lee Fon Yi refers to the resolutions of the defenders dated 26 January and 7 February 2001, to the acquisition of certain furniture and fittings in August 2001 and to the fact that Dong Guang Liu had authority to negotiate and act on behalf of the defenders. His conclusion that the defenders are the rightful owners of the subjects is a matter of law. His affidavit does not assist the defenders and adds nothing to the documentation which we have already considered. The second affidavit is the affidavit by Dong Guang Liu dated 6 January 2004 (7/17 of process). At paragraph 3 of that affidavit he states "I am now a creditor of Letham Grange, having loaned the sum of 460,910 pounds sterling to that company in December 1994". He refers to other members of his family lending money to the company at that time. At paragraph 5 he refers to certain repayments to account of his loan. At paragraphs 6, 7 and 10 he refers to the arrangement whereby the transfer of the loan was part of the consideration for the sale of the subjects from the company to the defenders. In that regard he refers to the resolutions of the defenders dated 26 January and 7 February 2001 and to the letter written by him on 28 February 2001 inviting the company "to acknowledge the assumption of the debt." In so far as he relies upon documents which we have already construed, his affidavit does not alter our construction of them. We note that there is an ambiguity in his affidavit in the sense that at paragraph 3 he states that he is a creditor of the company in respect of the loan made by him to the company at the same time as other members of his family. Such a statement is incompatible with the debt having been transferred from the company to the defenders. In fairness to him, he refers at paragraph 8 to the defenders remaining indebted to him for the amount of his loan which was transferred. Although he states in paragraph 11 that he remembers discussing with Mr. Gardner the arrangements for the defenders to assume liability for the debt, he does not state whether this was before or after the relevant date. However, there is a further and more significant difficulty for him. In his affidavit he refers to a loan by him to the company in December 1994 of the sum of £460,910 (paragraph 3). He also refers to repayments in 1997, 1998, 1999 and 2000 of £110,000, £135,000, £80,000 and £37,000 respectively (paragraph 5). On 8 February 2003 Dong Guang Liu, using the name Tong Kuang Liu, submitted a claim in the liquidation of the company (6/9/11 of process). It is admitted, in Answer 4, that Tong Kuang Liu is another name for Dong Guang Liu. The affidavit dated 6 January 2004 and the claim in the liquidation dated 8 February 2003 contain the same address for the deponent. Moreover, the claim in the liquidation has a letter attached to it dated 5 December 1994 confirming the loan in the sum of £460,910. There is also attached a schedule showing repayments in 1997, 1998, 1999 and 2000 of £110,000, £135,000, £80,000 and £37,000 respectively. The claim form contains an explicit warning to prospective claimants that it is a criminal offence to produce a false statement of claim. Despite that warning the claim submitted makes no reference to the transfer of any outstanding indebtedness from the company to the defenders. If the defenders had genuinely assumed liability for the indebtedness of the company to the Liu family then the claim in the liquidation of the company by Dong Guang Liu would be fraudulent. On the other hand, if the claim is genuine it calls into question the authenticity of the defences. The remaining affidavits are from members of the Liu family confirming the extent of their loan to the company and their understanding of the transfer of the indebtedness from the company to the defenders. The affidavit of Shiau Cheng Tzu Liou (7/18 of process) refers to the defenders' resolutions dated 26 January and 7 February 2001 concerning the cash price for the sale of the subjects and the assumption of the Liu family loan respectively. Thereafter he states that he was consulted by his son Dong Guang Liu regarding the proposed assumption of his loan and he agreed to that. He also states that as a co-Director of the company he signed a letter dated 2 March 2001 explaining that the consideration for the transfer of the subjects to the defenders consisted of £248,100 in cash and the assumption of £1.85m of loans due to the Liu family. As with other deponents, who were creditors to the extent of contributing towards the Liu family loan, we consider that their understanding of the arrangement is irrelevant to the determination of the terms of the contract for the sale of the subjects by the company to the defenders. Moreover, the reference by the deponent to a letter dated 2 March 2001 in his capacity as a Director of the company, is also of no relevance in the context of the disposition having been signed on 12 February 2001. He also lodged a claim in the liquidation dated 8 February 2003 in respect of the outstanding loan due by the company to him. As in the case of his son such a claim is incompatible with the genuineness of the defence to the action. The affidavit of King Hsia Chow Liu, the wife of Dong Guang Liu, (7/19 of process) and the affidavit of Jieh Jow Liou, the mother of Dong Guang Liu, (7/20 of process) refer to the existence of their respective loans to the company advanced in December 1994. They also refer to being consulted by Dong Guang Liu about the proposed assumption of the loan by the defenders and agreeing to that arrangement. In so far as they record their understanding that the transfer of the loans was part of the consideration for the purchase by the defenders of the subjects that is irrelevant to the determination of the issue whether there was agreement to that effect between the company and the defenders prior to the signing of the disposition. Each of them also lodged a claim in the liquidation dated 8 February 2003 in respect of the outstanding loan due by the company to her. The final affidavit submitted for our consideration was that of David James Finlay Halliday, a solicitor and partner with Messrs Boyds (7/21 of process). That part of his affidavit relying upon entries in the file of another firm of solicitors relating to an alleged conversation with Mr. Gardner appears to us to be double hearsay. His reference to his conversation with Mr. Gardner confirms, at its highest for the defenders, that there was a reference at some stage to the assumption of debt by the defenders but this "was only mentioned very briefly and probably only on one occasion and that nothing precise was said." In paragraph 5 it is stated that Mr. Gardiner could not be clear whether Mr. Liu had mentioned the assumption of debt before or after he had drafted the disposition. We do not consider that this supports the averment of the defenders that the assumption of the debt was part of the consideration. On the contrary, if it were to be part of the consideration it would be necessary for the solicitor acting for the parties to be aware of the amount of debt being transferred to enable him to ensure that the appropriate stamp duty was paid. In the present case the solicitor paid stamp duty on the basis of a purchase price of £248,100 and signed the disposition containing a clause certifying that the transaction did not form part of a larger transaction or a series of transactions in respect of which the amount or value of the aggregate amount of value of the consideration exceeded £500,000. As far as the affidavits are concerned we have reached the conclusion that they are of no value in relation to the issue of what was the agreed consideration between the company and the defenders for the transfer of the subjects. More significantly they do not detract from the unequivocal terms of the contemporaneous documents indicating that the agreed price for the sale of the subjects was £248,100.

[14] Nor do we consider that the un-audited accounts of the defenders for the period ended 31 December 2001 (7/2 of process) are of any assistance. Although these accounts show an indebtedness to the Liu family in the sum of £1.85m, this does not assist in the determination of whether that indebtedness formed part of the consideration for the purchase of the subjects by the defenders. Even if it had been of some assistance, it is to be observed that the accounts are un-audited and, moreover, contain a statement to the effect that the accounts have been prepared from information provided by management and that the auditors have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information.

[15] Apart from the significance, or otherwise, of documents which have been produced we consider that it is also significant that certain documents are absent. In the context of the transfer of a substantial loan as part of the consideration for the purchase of heritable property we would expect that there would be a contemporaneous formal transfer of indebtedness from the seller to the purchaser prior to the delivery of the disposition. In a situation where the same individual has a significant role in each of the selling and purchasing companies and appears to be the person responsible for issuing instructions on behalf of each of the companies, a contemporaneous document transferring the indebtedness from one company to the other appears to us to be all the more essential. As we have observed, the only document produced is the letter dated 28 February 2001 which purports to record the agreement to transfer the indebtedness more than two weeks after the execution of the disposition of the subjects. The absence of a contemporaneous agreement to transfer the indebtedness as part of the consideration for the sale of the subjects tends to support the incontrovertible conclusion based upon the contemporaneous documents. We also note that no formal discharges of the debts due by the company to the Liu family are produced. We presume from their absence that no contemporaneous discharges exist which might have supported the defenders' contention that the discharge of the debt was part of the consideration.

[16] Finally the accounts of the company for the year ended 31 October 1999 (6/9/6 of process) were approved by the directors of the company on 29 January 2002. They make no reference to any repayment of the loan from the Liu family members as a post balance sheet event. In accordance with U.K. accounting standards (SSAP 17) such an event should have been disclosed in these accounts.

[17] In his submissions counsel for the defenders relied upon the observations of Lord Hope of Craighead in Three Rivers D.C. v. Bank of England in the passage in his speech between paragraphs 89 and 98. We respectfully agree with these observations and note that at paragraph 95 a different approach to an application for summary decree may be appropriate in simpler cases than in more complex cases. In particular Lord Hope recognised that in some cases:

"It may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case, the easier it is likely to be to take that view and resort to what is properly called summary judgment."

We consider that the present case comes within that category and can be distinguished from the complex situation which existed in the case with which his Lordship was concerned. Having considered the pleadings and the documents lodged in process we have concluded that the defence is neither genuine nor authentic. The contemporaneous documents contradict the defenders' case. The subsequent documents either do not support it or, rather, lend weight to the incontrovertible conclusion from the contemporaneous documents that the agreed consideration for the sale of the subjects was £248,100. Accordingly, we shall refuse the reclaiming motion and adhere to the terms of the interlocutor of the Lord Ordinary dated 21 April 2004.