Morphites v Bernasconi and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Mr Justice Munby,Lord Justice Aldous |
| Judgment Date | 05 March 2003 |
| Neutral Citation | [2003] EWCA Civ 289 |
| Docket Number | Case No: 2001/1465 |
| Court | Court of Appeal (Civil Division) |
| Date | 05 March 2003 |
Lord Justice Aldous
Lord Justice Chadwick and
Mr Justice Munby
Case No: 2001/1465
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
(MR ANTHONY ELLERAY QC)
Mr David Chivers QC (instructed by Messrs Stephenson Harwood, One St Paul's Churchyard, London EC4M 8SH for the applicant/appellant)
Miss Clare Hoffmann (instructed by Messrs Steptoe & Johnson Rakisons of Clements House, 14/18 Gresham Street, London EC2V 7JE for the first and second defendants/respondents to the appeal)
TMC Transport (UK) Limited, a company incorporated under the Companies Acts 1948 and 1981, was ordered to be wound up on 20 December 1994. By these proceedings, commenced by application issued on 1 August 1997, the liquidator sought a declaration, under section 213 of the Insolvency Act 1986, that two former directors of the company and a firm of solicitors formerly instructed by the company were knowingly party to the carrying on of the business of the company with intent to defraud creditors and for other fraudulent purposes and that they were liable to make such contributions to the assets of the company as the court thought proper. On 13 September 2000 the liquidator accepted a payment into court, in the sum of £75,000, made by the solicitors. The claim proceeded to trial only against the two former directors, Mr Leonardo Bernasconi and Mr Pasqualino Monti.
The matter came on for trial before Mr Anthony Elleray QC, sitting as a deputy Judge of the High Court, in November 2000. In February 2001 the judge handed down a lengthy written judgment, in which he held that that fraudulent trading had been made out against the directors; and declared that they should contribute an amount of £35,000 to the assets of the company. That sum included an element (£17,500) which the judge described as punitive. The judge went on to hold that liability of the directors to make contribution had been satisfied – or, as he put it, extinguished – by the liquidator's acceptance of the payment into court made by the solicitors. He adjourned the matter for further argument in relation to costs.
The matter was restored in June 2001; no order having been drawn up following the judgment in February. The judge was asked to reconsider his decision that the whole of the amount of the contribution which the directors would otherwise have been liable to make should be treated as extinguished by the solicitors' payment. It was said that, notwithstanding that payment, the directors should remain liable to contribute an amount equal to the punitive element fixed by the judge. The judge rejected that contention. He went on to consider by whom the costs of the proceedings should be paid. He held (i) that the liquidator should pay 75% of the directors' costs incurred after the date (13 September 2000) on which he accepted the payment into court and (ii) that the directors should pay the liquidator's costs up to that date, but that those costs should include only 50% of the costs of adducing expert evidence. The judge refused permission to appeal.
The judge's order is dated 18 June 2001; although it was not agreed by counsel, approved by the judge and entered until February 2002. In the meantime the liquidator had filed an appellant's notice. He sought an order (i) that the directors be liable to make such contribution to the company's assets (in excess of £35,000) as this Court might think fit; in the alternative, (ii) that the directors be ordered to pay the punitive element of £17,500 by way of contribution in addition to the £75,000 paid by the solicitors; and (iii) that the directors pay the whole of the costs of the proceedings. Permission to appeal, limited to grounds 2, 3, and 4 in the appellant's notice, was granted by this Court (Lord Justice Jonathan Parker) on 11 February 2002. On 1 March 2002 the directors filed a respondents' notice raising issues by way of cross-appeal. Permission to cross-appeal, limited to grounds 3, 4 and 5 in the respondents' notice was granted by Lord Justice Jonathan Parker on 1 May 2002.
Accordingly, there were before this Court: (i) the liquidator's application for permission to appeal on ground 1 in the appellant's notice (which, although refused by Lord Justice Jonathan Parker on paper, he was given liberty to renew at the hearing of the appeal); (ii) the directors' application for permission to appeal on ground 1 in the respondents' notice (adjourned for hearing at the appeal) and on ground 2 (refused on paper, with liberty to renew); (iii) the liquidator's appeal; and (iv) the directors' cross-appeal. We indicated that we would hear argument on all issues; treating the applications for permission as if they were additional grounds of appeal or cross-appeal.
The issues raised on these appeals
The issues raised by the appeal and cross appeal may be summarised as follows:
(1) Whether the judge was correct, on the findings of fact which he made, to hold that the directors had been knowingly party to the carrying on of the business of the company with intent to defraud creditors or for other fraudulent purposes within the meaning of section 213 of the Insolvency Act 1986 – ground 3 in the respondents' notice.
(2) If so, whether the judge was correct in holding that the directors were not parties to fraudulent trading prior to 12 November 1993 (and, in particular, were not parties to fraudulent trading from, at the latest, 20 May 1993) – ground 1 in the appellant's notice.
(3) Whether any relevant loss was suffered by reason of the directors' participation in fraudulent trading, as found by the judge – grounds 4 and 5 in the respondents' notice.
(4) If so, whether the judge was correct in assessing the contribution to be made by the directors (exclusive of the punitive element) at £17,500 – ground 2 in the appellant's notice.
(5) Whether the judge was entitled (alternatively, whether it was a proper exercise of his discretion) to include a punitive element in the contribution for which he held the directors liable – grounds 1 and 2 in the respondents' notice.
(6) Whether the judge was correct to hold that the contribution for which he had held the directors liable (alternatively, the punitive element of that contribution) was satisfied by the payment made by the solicitors – ground 3 in the appellant's notice.
(7) Whether the judge ought to have ordered the directors to pay the costs of the proceedings from 13 September 2000 (as well as the costs before that date) – ground 4 in the appellant's notice.
The underlying facts
The underlying facts are not now in dispute. I take them from the judgment below. The company was established at the end of 1983 by Mr Monti, who was (and remains) a successful haulier operating throughout continental Europe through a number of locally incorporated companies bearing the initials "TMC" (derived from 'Transmetal Chimica') as part of their name. Until early in 1991 the day to day business of the company was managed by Mr Daniel Murat, who had a 25% share interest. Mr Monti and Mr Murat were the directors. In 1991 Mr Murat was replaced as a director by Mr Bernasconi, an accountant in practice in Switzerland. Mr Monti and Mr Bernasconi ceased, formally, to be directors of the company at the end of 1992 – before the events said to constitute fraudulent trading in the present case – but it was not in dispute that Mr Monti continued to control the company to an extent which required him to be treated as a de facto director.
By the end of the 1980's the company was tenant of warehouse and depot premises on the Sandwich Industrial Estate, in Kent, under four leases; each of which would continue, in accordance with its contractual terms, until 1998 or for some years thereafter. On 28 July 1989 the reversion to those leases was acquired by Ramac Holdings Limited. The leases were guaranteed by Mr Murat alone.
The company had traded profitably until the beginning of 1991 – as appeared from its accounts to 31 December 1990. But, by early 1991 Mr Monti had become concerned at reports of unpaid suppliers and, with the assistance of Mr Bernasconi, had investigated the cause of that concern. That investigation led to departure of Mr Murat; and to Mr Bernasconi's appointment as a director. To assist the company Mr Monti arranged for loan capital to be provided by Accoulis Tours Establishment, a company which (nominally at least) was owned and controlled by Mr Bernasconi but which was amenable to Mr Monti's wishes. The amount invested in 1991 was £135,000. A further £235,000 was lent by Accoulis in 1992; but part of that further loan may have represented unpaid interest due under the earlier loan. Nothing turns on the precise amount of 'new money' introduced by Accoulis.
The company remained unprofitable during 1992. By June 1992 management accounts showed an excess of liabilities over assets in the sum of £27,275. The company was suffering from a general downturn in the haulage industry; but Mr Monti and Mr Bernasconi identified the company's principal commercial problem as the onerous rental obligations under the leases. The problem was exacerbated by a pending upwards-only rent review. The solution was seen to be a relocation to other premises near Ramsgate. The difficulty in the way of relocation was the inability to find a purchaser for the leases or to agree terms with Ramac upon which they could be...
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