Elliott Green v Ireland; Re Stealth Construction Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice David Richards |
| Judgment Date | 20 May 2011 |
| Neutral Citation | [2011] EWHC 1305 (Ch) |
| Docket Number | Case No: 2553 of 2010 |
| Court | Chancery Division |
| Date | 20 May 2011 |
In the Matter of Stealth Construction Limited and in the Matter of the Insolvency Act 1986
[2011] EWHC 1305 (Ch)
Mr Justice David Richards
VICE CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER
Case No: 2553 of 2010
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
Civil Justice Centre
Manchester
Mr James Morgan (instructed by Freeth Cartwright LLP) for the Applicant
Mr John Pennie (solicitor, Dickinson Dees) for the Respondent
Hearing date: 18 May 2011
Introduction
The liquidator of Stealth Construction Limited (the company) applies for a declaration that the grant on 9 December 2008 of a second legal charge over a property owned by it to secure loans totalling £300,000 made by the respondent, Joanna Elizabeth Ireland, was a preference under s.239 of the Insolvency Act 1986. He applies for orders that the charge be set aside and that Mrs Ireland pay the sum of £130,414.09 paid to her as holder of the charge.
The charge was created pursuant to an agreement or arrangement made in October 2007, when Mrs Ireland advanced £145,000 as the first part of her loan. The loans were made for the purpose of, and duly applied in, the purchase of the property. The principal issues which arise are, first, whether the agreement or arrangement created binding obligations or gave rise to an equitable interest in or charge over the property, and, secondly, when the operative decision to grant the legal charge was made and whether it was influenced by a desire to put Mrs Ireland in a better position in an insolvent liquidation.
The Facts and evidence
The facts are largely uncontroversial. The liquidator and his solicitor provided witness statements in support of the application. Neither had direct knowledge of any relevant matter and their evidence was based on documents available to them and on interviews conducted by the liquidator.
Evidence in opposition to the application was given by Mrs Ireland and Philip Saunders, a partner in Saunders Bearman, solicitors who had acted for the company. Each provided witness statements on which they were, quite briefly, cross-examined. Mrs Ireland was not significantly challenged on any of her evidence. She was an entirely reliable and truthful witness with a clear recollection of relevant events, who gave her evidence in a straightforward and impressive manner, all the more so as she has been very seriously ill. Mr Saunders was challenged on part of his evidence, giving rise to the only real issue of fact in this case, and I will consider the quality of his evidence when dealing with that issue.
Neither party called the former directors of the company.
The company was incorporated in April 2007 and commenced business shortly afterwards. Its directors and equal shareholders were Susan Gillis and Manuel Costa. Miss Gillis was an interior designer and Mr Costa ran two construction companies. Their intention was to use their skills and experience in the purchase, redevelopment and sale or letting of luxury residential properties in London.
Between August 2007 and March 2008 the company purchased three properties in Primrose Hill and St John's Wood. These purchases were funded in each case by loans made by Royal Bank of Scotland (RBS) and a number of individuals. Loans were also made to fund the redevelopment of the properties.
The property relevant to the present application was 20 Hill Road, St John's Wood, London NW8. Contracts of purchase at a price of £2.85m, with £142,500 payable on exchange, were exchanged on 26 October 2007. Because the vendors needed to obtain a grant of probate, it was agreed that completion would be delayed until early 2008. The purchase was completed on 25 March 2008.
The purchase of the property was funded by loans of £2m from RBS and £300,000 from Mrs Ireland and by further loans from other individuals. A first legal charge over the property was granted to RBS immediately on completion on 25 March 2008. The second legal charge in favour of Mrs Ireland, in issue in these proceedings, was granted on 9 December 2008.
Mrs Ireland and Miss Gillis are sisters. On a number of occasions during the autumn of 2007 Miss Gillis asked Mrs Ireland if she wished to invest in the company. Miss Gillis stayed with Mrs Ireland and her husband over the weekend of 20/21 October 2007. In discussions over the weekend, Mrs Ireland agreed to lend £300,000 to the company for a term of one year, with interest at the rate of 15% payable at six-monthly intervals. The purpose of the loan was to assist in the purchase of the property. Miss Gillis told Mrs Ireland that the bulk of the purchase price would be paid out of a loan from RBS secured by a first charge. Mrs Ireland told Miss Gillis that she would require a second charge over the property.
On Monday 22 October 2007, Miss Gillis emailed Mrs Ireland as follows:
" Hi Jo
Firstly thank you for a wonderful day yesterday. Perry had a brilliant time and can't wait to come back.
Regarding the deposit for hill road we are trying to agree to only transfer 5% in his account and he will try and do it with that.
Therefore can you please transfer over £145,000 to:
[Bank]
[sort code]
Saunders bearman client a/c
[account number]
I will let him know that it is from you and needs to go against hill road
Also I will draw up a document that I will send to you having it signed by stealth but will make sure that both me and manuel have signed it.
I will also arrange for you to have second charge over hill road and will instruct Phillip to draw that document up for you.
Hope that this is alright.
Have a wonderful time in Rome
Lots and lots of love
Suzy"
On the same day Mrs Ireland replied:
" Suzy,
Do remind me tomorrow.
Any news on the cooker,
Jo"
On 23 October 2007 Mrs Ireland transferred £145,000 to the account of the company's solicitors Saunders Bearman. They received instructions to apply it in payment of the deposit on exchange of contracts for the purchase of the property and did so on 26 October 2007. There is an issue, to which I will later return, as to what, if any, instructions were given to Saunders Bearman as to the terms of the loan or the giving of a second charge on the property.
Also on 23 October 2007, Miss Gillis sent an unsigned letter to Mrs Ireland in the following terms:
" Dear Jo
RE: 20 HILL ROAD LONDON NW8
Further to our various discussions I confirm that you have agreed to lend to stealth the sum of £300,000 (three hundred thousand pounds) in relation to the purchase and development of the above mentioned property.
The sum loaned has been done so on the following basis:
£145,000
23 rd October 2007 for the sole purpose of exchange
£155,000
on completion which will be on production of probate but in any event not sooner than the 8 th January 2008 with a long stop date of end of March 2008.
Interest is as follows:
15% on the whole amount to be paid as stated below:
7.5% by the 23 rd of April 2008
7.5% by the 23 rd of October 2008
In the event that stealth construction makes more than 20% net profit on the whole project then stealth shall pay a further 50% of any proceeds over the 20% net profit."
Mrs Ireland's evidence, which I accept, is that the profit share provision included at the end of the letter had not been agreed or discussed with her. The letter was not signed by Miss Gillis or anyone else on behalf of the company or by Mrs Ireland.
As the letter makes clear, it was envisaged that completion of the purchase would be delayed until January 2008 at the earliest pending production of a grant of probate. In fact it did not occur until 25 March 2008 when the balance of the purchase price, amounting to £2,715,165, was paid. It was funded by a loan of just under £2m from RBS, the second tranche of £155,000 of the loan from Mrs Ireland (less interest due on the first tranche of £5,875) and further loans from other individuals.
Mrs Ireland assumed that the necessary steps would have been taken by the company to grant her the second charge which had been agreed in her discussions with Miss Gillis on 20/21 October 2007. She was very seriously ill throughout the period from October 2007 until well into 2009 and quite naturally the grant of the charge was the least of her concerns.
In October 2008, when the loan and accrued interest became payable, Miss Gillis and Mr Costa told her that the company was facing at least cash-flow difficulties and was unable to pay the sums then due. Her husband suggested that she should check whether the second charge had in fact been granted and enquiries by a solicitor friend disclosed that it had not. Mrs Ireland was understandably very angry and upset and made it very clear to her sister that she expected the charge to be granted.
Steps were then taken to put the second charge in place. The consent of RBS as first chargee was required under the terms of its security and first Miss Gillis and then Saunders Bearman, in a letter dated 27 November 2008, requested its consent, which was given. Under cover of a letter dated 26 November 2008, Saunders Bearman sent a draft charge to Miss Gillis. In the letter, Mr Saunders wrote that she was going to let him see the letter between her and Mrs Ireland recording the loan, which would be annexed to the charge, and in a postscript stated that he had received from her the two letters dated 23 October 2007 and 28 February 2008 and that he had amended the charge on that basis.
Under cover of a compliments slip dated 26 November 2008 Mr Saunders sent the revised draft charge to Mrs Ireland. Mr Saunders wrote on the compliments slip:
" ...
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