E-Clear (UK) Plc (In Liquidation) v Elias Elia, Ian Defty (2012)
A court granted summary judgment where it had been clear beyond doubt that defences to a company's proprietary claim would fail as even if it could have been established that company funds used to purchase property had been repayments for funds personally loaned to the company, it was not possible to set off those amounts against the company's continuing proprietary claim.
The applicant company in liquidation (E) applied for summary judgment against the third respondent (R3).
E, who had provided financial services, entered administration following the insolvency of two of its major customers who claimed refunds from E. E's essential claim against the first respondent (R1) was for proprietary remedies in relation to payments R1 had allegedly caused banks to make to himself and/or otherwise to his benefit in breach of fiduciary duties he owed as a director of E. E also claimed that it was the beneficial owner of an interest in real property. R3, who was R1's mother, asserted an interest in the property. R1 had paid the required 10 per cent deposit from E's business account. In response to E's allegations, R1 sought to set off sums he had allegedly lent to E and had paid on E's behalf. A bankruptcy order was subsequently made against R1, and it was agreed that he should take no further part in the instant proceedings. Similarly, the second respondent, R1's trustee in bankruptcy, had entered into a settlement agreement with E. R3 had put in a defence that was superseded by a draft amended defence, but failed to serve the defence on E. E sought summary judgment against R3 on the basis that she had failed to file and serve a defence. R3, in her draft amended defence, had alleged that there were inaccuracies and discrepancies in figures in E's statement of claim, and sought to rely on R1's status as a creditor of E, on the basis of payments R1 had allegedly made to E. R3 had also produced a new draft balance sheet in support of her assertion that E had been solvent at the relevant time. R3 had rejected registration of her interest as legally unnecessary.
E submitted that the property had been purchased using E's funds which constituted 35.5 per cent of the total purchase price and that E had a beneficial interest in the property; R1 had acted in breach of his fiduciary duty to E; even if E owed R1 money, there was no legal possibility of setting off any amount R1 claimed; R3 did not have a legal interest in the property that had priority over E's pre-existing beneficial interest.
(1) Summary judgment could only be granted if E could show that R3 had no real prospect of defending her claim; there had to be a real, as opposed to fanciful, prospect of success and the court was required to take into account evidence that could reasonably be expected would be led at trial. However, the court should hesitate before granting summary judgment without a trial. (2) It was demonstrably clear from the evidence that the property had been bought with E's funds and it was common ground that those funds constituted 35.5 per cent of the property's purchase price. (3) R3's newly produced balance sheet was, on its face, very thin evidence of the value of E's net assets. The evidence as a whole did not provide any legitimate justification for the new draft balance sheet; firm evidence needed to be put forward to support a balance sheet that gave such a dramatic restatement of E's position, especially where the sources of information for the new balance sheet, and the person responsible for the document, was R1. It was clear that R1 was painting a dramatically different picture of E's solvency. Moreover, the new balance sheet had not been signed by an accountant, and its contents were directly contradicted by the sworn testimony of the person who had been responsible for its preparation. (4) R1 had not made any contemporary mention of any loans he had made to E; claims that R1 had made loans to E flew in the face of contemporary documents. There was no evidence to support an elaborate transaction as R3 alleged, and there were no emails, or correspondence, providing a trail that might indicate such transactions were being carried out or contemplated. Looking at the evidence in context, the position was clear; complex commercial transactions as alleged were almost invariably recorded in writing or at least partly written. Despite the fact that there was no real prospect of the existence of loans made by R1 to E being established, it would not have mattered for reasons of law even if such a debt could have been established, as amounts personally owed in debt to R1 could not be set off against E's continuing proprietary claim, Guinness Plc v Saunders (1987) 3 B.C.C. 520and Lehman Brothers International (Europe) (In Administration), Re  EWHC 3228 (Ch),  2 B.C.L.C. 301 applied. (5) E's claim that any equitable interest R3 might have had could not take priority over E's prior beneficial interest was unanswerable; R3's defence had no prospect of success. It was extremely unlikely that any material would emerge prior to trial; if there had been any relevant documents, they would have been in R1 and R3's possession and their claims of being denied access to documents by E were incorrect. It was clear beyond doubt that R3's defences would fail.
(Appeal subsequently allowed; for the Court of Appeal decision click here)
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25 Apr 2012
Judge Mackie QC