Heather Capital Limited (in Liquidation) And Paul Duffy (as Liquidator Thereof) Against Burness Paull & Williamsons Llp
| Jurisdiction | Scotland |
| Judge | Lord Tyre |
| Neutral Citation | [2015] CSOH 150 |
| Court | Court of Session |
| Published date | 06 November 2015 |
| Year | 2015 |
| Docket Number | CA208/14 |
| Date | 06 November 2015 |
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 150
CA208/14
OPINION OF LORD TYRE
In the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator thereof)
Pursuer;
against
BURNESS PAULL & WILLIAMSONS LLP
Defenders:
Pursuer: Lord Davidson of Glen Clova QC; Shepherd and Wedderburn LLP
Defenders: R W Dunlop QC, Paterson; CMS Cameron McKenna LLP
6 November 2015
Introduction
[1] The pursuer, a company in liquidation, was incorporated in the Isle of Man on 31 August 2005. Its business was to operate as a hedge fund, making investments on behalf of its own investors. Responsibility for investment decision-making was delegated to an investment committee comprising two of its directors, namely Mr Gregory King and Mr Santo Volpe. Guidelines issued by the investment committee indicated that companies involved in property-related lending, invoice discounting and financing commercial receivables were regarded as particularly suitable as borrowers. Prior to its winding up it received funds for investment in excess of £280 million.
[2] The pursuer avers that during its operation it and its investors were defrauded by the diversion of invested funds exceeding £90 million, under the guise of fictitious loans to various shelf companies. The mechanism of the fraud is said to have been the same in each case. Companies owned and/or controlled by Gregory King were incorporated in Gibraltar. The pursuer then entered into a number of credit facility agreements with these companies (referred to in the pleadings as “First Level SPVs”). Each agreement was secured by a debenture. The pursuer recorded loans to the various First Level SPVs in its books of account. In fact, the money was never paid to them. On the instructions of certain individuals, it was in fact paid out of the solicitors’ client accounts in which it had been deposited to third parties. In many cases the money was paid into the bank account of a London trader named Nicholas Levene. Mr Levene is currently serving a 13-year prison sentence, having pleaded guilty to 14 charges of fraud, false accounting and obtaining money by deception.
[3] The present action concerns funds amounting in total to £7.3 million which, according to the pursuer’s books of account, were lent to four Gibraltar companies called Bayhill Investments Limited (“Bayhill”), Brookhill Investments Company Limited (“Brookhill”), Hampsey Investments Limited (“Hampsey”) and Bellwood Limited (“Bellwood”). The defenders were instructed to act on behalf of the pursuer in respect of the provision of a template credit facility agreement and the making of the proposed loans to the four Gibraltar companies. The funds to be lent had been deposited in the defenders’ client account. On the instructions of an individual who, according to the pursuer’s averments, had no actual or apparent authority, the defenders’ banking partner, Mr Scott Wilson, transferred £3.3 million to a bank account in the name of Mr Levene, and £4 million to an account in the name of a company called Mathon plc. Nothing was sent to any of the four First Level SPVs. The pursuer now sues, on a variety of grounds narrated more fully below, for payment by the defenders of the sum of £7.3 million. The defenders deny liability to make payment of any sum to the pursuer. They contend, inter alia, (i) that, on the pursuer’s own averments, all of the sums comprising the £7.3 million were repaid to the pursuer and accordingly that the pursuer has failed relevantly to aver circumstances in which it has sustained any loss as a consequence of anything done by them; and (ii) that any obligation incumbent upon them has been extinguished by the operation of prescription. The case came before me for debate of these two issues.
The pursuer’s averments
[4] The following narrative is derived from the pursuer’s averments which must of course be taken pro veritate for the purposes of this opinion. Not all of them are admitted by the defenders. It should be noted that it is not averred that any of the individuals named in the narrative (other than Mr Levene) has to date been charged with any criminal offence.
Bayhill, Brookhill and Hampsey
[5] On 12 April 2006, Mr King instructed a Gibraltar lawyer, Melo Triay, to form new Gibraltar-registered companies and to email the details of these companies to Mr Wilson. On 16 April, Mr Wilson emailed draft credit agreements for Bayhill, Brookhill and Hampsey to Mr King and Mr Triay. He gave advice regarding the execution procedures to be followed and requested that debentures be drawn up and executed in accordance with the law of Gibraltar. On 18 April, the directors of Bayhill, Brookhill and Hampsey met in Gibraltar and executed a credit facility agreement with the pursuer, together with debentures as security for loans, in each case, of £2 million. Mr King and Mr Volpe signed the agreements and debentures on behalf of the pursuer. On 20 April, Mr John Caulfield emailed Mr Wilson to inform him that funds would be transferred to his client account the following day. Mr Caulfield was an employee of Mathon plc, a company related to the pursuer which carried on the business of providing bridging finance secured over heritable property. He was not a director or employee of the pursuer. On 21 April, three payments of £1.3 million, £1.1 million and £900,000 were made from the pursuer’s account with a private bank to the defenders’ client account.
[6] Also on 21 April 2006, Mr King sent an email to Mr Levene and Mr Volpe, but bearing to be an instruction to Mr Wilson, stating
“Scott – Please send £3.3 million to the account of Nick Levene, the details of which are listed below”. This email was forwarded to Mr Wilson by Mr Caulfield on 24 April, with the comment “Scott – Below is the email that should have been forwarded to you. Bank information where the payments have to be transferred are detailed. Gregory asked that you confirm to him and Nick Levene once the transfer has taken place”.
Mr Wilson then authorised the payment of £3.3 million from the defenders’ client account to the personal account of Mr Levene, and emailed Messrs Levene and King to advise that the transfer had been effected and to request acknowledgment of receipt. The following day, Mr Wilson emailed Mr Levene, copying in Mr King, specifying the proportions in respect of which the funds were “from” the three Gibraltar SPVs.
[7] On 3 May 2006, Mr Wilson sent documentation for Bayhill, Brookhill and Hampsey, including the debentures entered into between the pursuer and each of them, to Mr Andrew Ashworth, the managing director of Abacus Financial Services Limited, which provided management and administrations services to the pursuer. At this time Mr Ashworth was also a director of the pursuer. Mr Wilson did not mention that the funds advanced by the pursuer had been paid into a bank account in London in the name of Mr Levene. Abacus recorded the loans in the pursuer’s books of account as having been made to Bayhill, Brookhill and Hampsey respectively.
Bellwood
[8] On 11 July 2006, the directors of Bellwood executed a credit facility agreement with the pursuer, permitting loans up to a maximum amount of £4 million, and granted a debenture in favour of the pursuer. Copies of the documents were emailed to the defenders. On the same day, £4 million was transferred from the pursuer’s bank account to the defenders’ client account. On 12 July, Mr Caulfield emailed Mr Wilson as follows:
“Scott – Re the £4m received in your Client Account yesterday ex Heather Capital Limited on behalf of Bellwood Limited. I confirm that this sum should be forwarded to the undernoted today. [Mr Caulfield supplied the bank account details.] Account name Mathon plc.”
Mr Wilson then authorised the payment of £4 million from the defenders’ client account to the Mathon account specified. It is recorded in Mathon’s books of account as the repayment of a loan made by Mathon on 28 June 2006 to Mr Levene.
[9] On 3 May 2006, Mr Wilson sent documentation for Bellwood, including the debentures entered into with the pursuer , to Abacus. He did not mention that the funds advanced by the pursuer had been paid into a bank account in the name of Mathon. Abacus recorded the loan in the pursuer’s books of account as having been made to Bellwood.
“Repayment” of the loans
[10] Early in 2007, the pursuer’s auditors, who were the Isle of Man member firm of KPMG International Co-operative, raised questions about the propriety and recoverability of what appeared in the pursuer’s books of account as loans to the First Level SPVs. In response, Mr King created the false impression that the First Level SPVs had themselves entered into loan agreements with other Gibraltar companies (“the Second Level SPVs”) and that those loans were secured over heritable property. KPMG, however, identified a number of concerns relating to the documentation of these loans and recommended that further work be undertaken in relation to the First and Second Level SPVs. The issues raised by KPMG included (i) difficulties reconciling the names of supposed Second Level SPV borrowers and the properties against which loans were said to be secured with information available from the Land Registry; (ii) missing documentation; and (iii) concerns about the enforceability of security given by the supposed Second Level SPV borrowers.
[11] Mr King then took further steps to conceal the original fraud. Between April and June 2007, he instructed additional funds to be transferred from the pursuer to Mathon and to another company called Bathon Limited. On 1 and 10 May 2007, a total of £33,800,000 was transferred from the pursuer’s bank account to Mathon. On 11 June, £21,500,000 was transferred from the pursuer’s bank account to Bathon. The payments were referred to as “Drawdown”. Fictitious loans by Mathon and Bathon were created to give the appearance that these funds had been advanced to legitimate...
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