Scottish Court of Session Decisions

Petitioners: Ower; Pinsent Masons LLP

Respondent: MacDougall; Wilson Terris & Co SSC

22 June 2012

[1] This is an application under section 242 of the Insolvency Act 1986 by the joint administrators of Questway Limited ("Questway") against Mr David Simpson. Questway was one of an informal group of companies which Mr Ralph Norman Pelosi controlled. By early 2011 one of those companies, Oceancrown Ltd was in serious financial difficulty as Hadrian s.a.r.l., the assignees of its secured lender, Anglo Irish Bank Corporation Ltd, were putting it under pressure to reduce its arrears or refinance its debt. Because the companies in the informal group had given cross-guarantees, they also were under threat. Hadrian s.a.r.l. placed Oceancrown Limited in administration on 3 August 2011 and on 11 August 2011 the directors of Questway and other companies in the group appointed the pursuers as joint administrators.

[2] Mr Simpson is a director of Questway and was financial manager of that company and several other companies which Mr Pelosi controlled.

[3] On 28 April 2011 Questway transferred £90,000 from its bank account with the Bank of Scotland plc to Mr Simpson. The joint administrators wrote to Mr Simpson to request an explanation of the transfer. They were not satisfied with his response and commenced these proceedings asserting that the transfer was a gratuitous alienation and seeking an order against him for repayment of the sum.

[4] It was clear from the evidence of Mr Alan Brown, one of the joint administrators and from Mr Pelosi that Questway's bank account was used for transactions involving many of the companies which Mr Pelosi controlled and that no one maintained adequate financial records of those transactions. It was also clear from Mr Pelosi's testimony that he received funds due to the companies under his control into his personal bank account and that he regularly transferred sums from his personal accounts to Questway's bank account. The bank statement for 28 April 2011 showed the withdrawal from Questway's account of £9,000 at the Rutherglen branch and also the electronic transfer of £90,000 to Mr Simpson. It also recorded the transfer from Mr Pelosi's bank account into Questway's account on the same day of two payments of £45,000 and £53,500 respectively.

[5] A statement of Mr Pelosi's account with The Royal Bank of Scotland plc dated 3 May 2011, which is the first day after the May bank holiday that year, showed those two payments and other payments being made from the account which started the day with a credit balance of £235,043.22 and ended the day with a credit balance of £87,643.07.

[6] Mr Simpson's bank statement with Lloyds TSB Bank plc showed the receipt of the £90,000 by electronic transfer on 28 April 2011.

[7] Mr Simpson wrote on 2 November 2011 to the joint administrators to confirm his explanation of the transaction. He stated that the payment of £90,000 was "part of a personal transaction of £98,500 due to me by Mr Pelosi." He explained that "unfortunately Mr Pelosi transferred the funds from his personal account to the account of Questway Ltd, instead of mine in error." He stated that the remaining £8,500 was settled in cash. By letter dated 9 November 2011 Mr Brown told Mr Simpson that that was not an adequate explanation and that he intended to pursue recovery of the sum as a gratuitous alienation. He invited Mr Simpson to send any further information which he wished him to consider within seven days. Mr Simpson did not supply any further information and the joint administrators commenced these proceedings in December 2011.

[8] In the Answers to the petition Mr Simpson's legal advisers averred that

"As part of their personal relationship Mr Pelosi owed the respondent a personal debt of £98,500. Mr Pelosi agreed to repay this debt in full on 28 April 2011."

The Answers contained averments that Mr Pelosi had transferred the sums in error into Questway's account when he had intended to transfer them to Mr Simpson and that when he discovered the error Mr Pelosi instructed the transfer of £90,000 from the company's account to Mr Simpson's account on the same day and withdrew £9,000 from the company's account, of which he paid £8,500 to Mr Simpson in cash.

[9] On 12 April 2012 Lord Malcolm ordered Mr Simpson to confirm the nature of the personal debt of £98,500 spoken of in the Answers. Mr Simpson's solicitors, Miller Beckett & Jackson, wrote on 25 April in response to that interlocutor and stated:

"We can confirm that the nature of the personal debt was a series of loans, of varying amounts of money, over a period of several years provided by Mr Simpson to Mr Pelosi in order to assist Mr Pelosi financially."

[10] The joint administrators were understandably unhappy at the terseness of this explanation and on their motion on 15 May 2012 I ordered Mr Simpson to intimate within seven days the details of all the personal loans which he had made to Mr Pelosi including their date, their amount and their purpose. Miller Beckett & Jackson wrote to the solicitors for the joint administrators on 22 May and stated that between 19 May 2009 and 20 July 2010 Mr Simpson had made 20 loan payments to Mr Pelosi comprising a total balance of £136,500. They enclosed a schedule setting out those payments which I discuss below. They stated that

"These loans were made in cash by Mr Simpson to Mr Pelosi. Our client has provided us with bank statements which show corresponding withdrawals from his account on those dates."

They said that they were redacting the statements and would lodge them in process. When the solicitors lodged those redacted bank statements all that the joint administrators could glean from them was that sums which corresponded to entries on the schedule had been withdrawn by cheque from Mr Simpson's account on certain dates.

[11] The joint administrators therefore sought to recover Mr Pelosi's bank statements to see if the cheques had been paid into his account. This prompted Miller Beckett & Jackson to write on 19 June 2012 with the following explanation:

"`From the information provided to us by Mr Simpson, the predominant method that he adopted for withdrawing money from his bank for the cash loans was that he went to his bank and tendered a cheque (made payable to himself) at the counter and the appropriate sum would be made over to him by the teller. The method of cash withdrawal allowed Mr Simpson to keep a record showing the various loans made to Mr Pelosi and accordingly any reference to "cheque" on Mr Simpson's bank statements relates to a cheque made out in cash by Mr Simpson at his bank."

They confirmed that all payments to Mr Pelosi, except for two cheques to him, were made in cash.

[12] Mr Simpson's evidence was that other than those two cheques and a payment of £16,650 which he claimed to have given Mr Pelosi on 3 July 2009 from money which his father had given him, all the sums were vouched by entries in his otherwise redacted bank statements which showed sums being paid out of his account by cheque. He claimed also to have kept a note in his briefcase of sums lent to Mr Pelosi and the limited repayments by him. But that note was not produced. He stated that interest was not due on his advances and no terms had been agreed for repayment. Mr Pelosi gave no receipts or other acknowledgement of the advances.

[13] Although he signed an affidavit which appeared to support the detail of Mr Simpson's evidence, it was clear from Mr Pelosi's oral evidence that he relied on Mr Simpson for that information and that he was not able to speak to the circumstances in which he obtained the alleged loans. He had kept no record of the loans but simply had asked Mr Simpson to obtain cash for his various businesses as and when he needed to pay for something. There was no suggestion that the sums which Mr Simpson allegedly provided were used for purposes other than the various businesses which he controlled. He could not confirm when and how much money he had obtained from Mr Simpson.

[14] The asserted factual basis of Mr Simpson's defence was that the £90,000 which the joint administrators claimed as a gratuitous alienation was not Questway's property because Mr Pelosi had paid the money into Questway's account in error when seeking to repay Mr Simpson £98,500.

[15] I am not prepared to accept that explanation and do not accept the evidence of Mr Simpson or Mr Pelosi as credible or reliable for the following reasons.

[16] First, there was a very substantial disparity between Mr Pelosi's financial means and Mr Simpson's. In a statement of assets and liabilities dated 2 October 2009 which Mr Pelosi signed and submitted to the Anglo Irish Bank, he declared that he had assets of over £24 million and liabilities of £2.24 million. Setting aside his valuation of his unquoted investments (£19.5 million) because of the uncertainty of such valuations, he still had net assets of over £2 million in equity in heritable property, private number plates and a Bentley car. In contrast with that, Mr Simpson earned about £32,000 per year gross and lived in a former council house which had a value of between £85,000 and £90,000. A pattern of lending between May 2009 and July 2010 in which Mr Simpson advanced £136,500 to Mr Pelosi is inherently unlikely.

[17] Secondly, I am not persuaded that either Mr Simpson or Mr Pelosi gave truthful evidence to explain how Mr Simpson was able to advance £121,580 between 19 May and 7 July 2009. Of that sum Mr Simpson claimed that £16,650 came from £20,000 which his father had given him. His bank statement for the period 19 May 2009 to 28 July 2009 started with a balance of £3,169.30 and ended with a balance of £4,454.85. But in that period £164,705.51 was paid into the account and £163,419.96 was paid out. Mr Simpson gave evidence that he had inherited a substantial sum of money from a relative. Mr Pelosi suggested that Mr Simpson had received sums from a critical illness policy. Neither story was vouched by any documentation.

[18] Thirdly, there was no contemporaneous vouching of any of the alleged payments to Mr Pelosi. Mr Simpson did not produce the note on which he said he had recorded the payments and repayments. Nor did his solicitors refer to such a note in their correspondence. Mr Pelosi kept no records and no receipts. Mr Pelosi did not disclose the alleged loans in his statement of assets and liabilities which he submitted to the Anglo Irish Bank. In that statement he declared that he had no personal loans or liabilities other than mortgages, credit cards and hire purchase liabilities. If Mr Simpson's schedule of payments were to be accepted, Mr Pelosi received £3,400 from him on the day on which he signed that statement and that payment brought his total indebtedness to £124,980. Yet Mr Pelosi did not declare this substantial debt to his lenders.

[19] Mr Pelosi's estates were sequestrated on 20 February 2012. Christine Grant, who assists Mr Blair Nimmo, his trustee in sequestration, gave evidence that Mr Pelosi had told her that the payment to Questway was a repayment in full of his personal debt to Mr Simpson of £98,500. In his statement of assets and liabilities dated 11 April 2012 he filled in a list of creditors totalling £12,752,700, including £8,500,000 allegedly due to his wife, but made no mention of the residual debt of £30,000 to Mr Simpson. He and Mr Simpson gave evidence explaining this on the basis that the latter had written off the debt on the former's bankruptcy. But if that were believed, it would not alter the point that there was no contemporaneous documentary evidence of the loans.

[20] The redacted bank statements gave no indication of the person to whom the money from the cashed cheques was paid. While, as I have stated, Miller Beckett & Jackson in their letter of 19 June 2012 recorded Mr Simpson's explanation that this method of withdrawing cash allowed him to keep a record of the loans, Mr Simpson on re-examination stated that he had always used cheques to withdraw cash for "the company". If that is so, entries in the bank statements referring to cheques are not in themselves evidence of personal loans to Mr Pelosi.

[21] Fourthly, I am not satisfied by the explanation of how Mr Pelosi came to make the alleged mistake in transferring the sums to Questway rather than to Mr Simpson. Mr Pelosi gave evidence that he had gone into the office and used a computer to gain access to his bank account. The program had a list of accounts with which he had transacted and he made a mistake in clicking on Questway's account instead of Mr Simpson's. It involved Mr Pelosi making the same mistake twice as he paid £45,000 and then £53,500. Further, his evidence conflicted with Mr Simpson's. Mr Pelosi said that when he was in the office he spoke on the telephone with Mr Simpson who was elsewhere. Mr Simpson's account was that he was in the office when Mr Pelosi phoned from somewhere else.

[22] They agreed that when it was discovered that the money had not reached Mr Simpson's account they both went to the branch of the Bank of Scotland in Rutherglen to arrange the transfer from Questway to Mr Simpson's account. But beyond confirming the withdrawal of £9,000 in cash, of which £8,500 was paid to Mr Simpson, and the electronic transfer of £90,000, they did not recall the details of the transaction.

[23] Fifthly, I consider the more likely explanation for the transactions between May 2009 and July 2010 is that both Mr Pelosi and Mr Simpson as the financial controller were in the habit of paying sums due to the companies into their personal accounts and drawing on those sums to pay both corporate and other bills. Indeed, Mr Pelosi explained that he had been able to pay £98,500 on 28 April 2011 from his personal account because £200,000 due to one of his companies, Mitchell Hire Drive Limited, had been paid into his personal account. A similar practice on Mr Simpson's part would explain the large sums entering and leaving his account between May and July 2009. There was also evidence of a mandate by Oceancrown Limited signed by Mr Pelosi on 6 July 2011 instructing Network Rail to make rental payments to Mitchells Hire Drive Limited and Mr Brown and his assistant Mr Graeme Bain both gave uncontested evidence that Mitchell Hire Drive Ltd continued to collect rents due to Questway after the latter company entered into administration. I was left with a clear impression that Mr Pelosi did not distinguish between sums due to individual companies in his control or between corporate and personal funds and that Mr Simpson as the financial controller was complaisant in performing his duties for him.

[24] Sixthly, I have had regard to the clear evidence that those in control of the companies did not keep adequate financial records. Both Mr Pelosi and Mr Simpson claimed that the books and records of the companies had been handed over to the administrators but the unchallenged evidence of Mr Brown and Mr Bain was that the two boxes of records which were produced comprised mainly out of date leases and that the administrators' staff had not been able to reconcile the transactions recorded in Questway's bank statements with its business activities.

[25] This failure to keep adequate records is in the context of a group of companies which owned approximately 120 properties and had borrowings of about £20 million. Mr Pelosi was a shadow director of the companies and traded with benefit of limited liability. Mr Simpson as director of Questway and other companies failed to maintain adequate company records to the detriment of the companies' creditors in breach of his statutory duties under section 386 of the Companies Act 2006. Against that background I would in any event be slow to accept their unvouched evidence of these financial transactions.

[26] In view of this, it appears to me that the starting point in the legal assessment is to ascertain whether the money in Questway's account was its money. In my view it was. As a matter of property law the ius crediti against the bank was Questway's property and that property right was not qualified by any personal claim which Mr Pelosi may have had to be paid money in order to reverse unjustified enrichment. Had a floating charge crystallised over Questway's assets when the sum was in its bank account, it would have attached Questway's right to obtain payment of those sums from the bank.

[27] Mr Simpson's defence depends on establishing that the sum represented an attempted repayment of private loan and that it was paid into Questway's account in error. Mr MacDougall submitted on his behalf that Mr Pelosi had a claim against Questway for unjustified enrichment. That meant (a) that the money in the bank account was not Questway's asset and so there was no alienation or, in any event (b) that the discharge of the obligation to reverse the unjustified enrichment, which was the correlate of Mr Pelosi's right, by the transfer of the £90,000 amounted to adequate consideration in terms of section 242(4)(b) of the Insolvency Act 1986. I have dealt with the first argument in paragraph [26] above. I do not have to address the second submission as Mr Simpson has failed to establish the factual substratum to support the claim for unjustified enrichment. His defence accordingly fails.

Conclusion
[28] I therefore order Mr Simpson to pay to the petitioners the sum of £90,000 and I award interest on that sum at the judicial rate from today's date.