National Merchant Buying Society Ltd v Andrew Bellamy (First Defendant) Stephen Mallett (Second Defendant/Appellant)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Kitchin,Lord Justice Longmore |
| Judgment Date | 02 May 2013 |
| Neutral Citation | [2013] EWCA Civ 452 |
| Docket Number | Case No: A3/2012/2132 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 May 2013 |
[2013] EWCA Civ 452
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Nicholas Strauss QC (sitting as a Deputy Judge of the High Court)
Claim Nos: HC11C04505 & OBM30584
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Longmore
Lord Justice Rimer
and
Lord Justice Kitchin
Case No: A3/2012/2132
and
Mr Jonathan Miller (instructed by Whitehead Monckton Solicitors) for the Appellant, Stephen Mallett
Mr Andrew Maguire (instructed by The Smith Partnership) for the Respondent
Hearing date: 19 February 2013
Introduction
The claimant/respondent is National Merchant Buying Society Limited ('the Society'). From 2000 until December 2008, it had a business relationship with CTF Supplies Limited ('CTF'). The shares in CTF were originally owned 50/50 by Andrew Bellamy (the first defendant) and Stephen Mallett (the second defendant/appellant), who were both directors of CTF. On 17 May 2002, Mr Bellamy and Mr Mallett gave the Society a joint and several guarantee for the due payment of all sums then or thereafter owing to it by CTF. Mr Mallett left CTF in December 2006 on terms under which his shares were to be bought out. Mr Bellamy continued to run CTF.
CTF became insolvent in 2008. Its business relationship with the Society ended in December 2008. It entered into administration on 13 January 2009 and it went into creditors' voluntary liquidation nine days later. The Society was one of its creditors.
By proceedings issued on 8 December 2010, the Society claimed payment by each of Mr Bellamy and Mr Mallett under their guarantee of the amounts of unpaid invoices for goods purchased by CTF. Both defendants defended the claim, which was tried over four days in April 2012 before Mr Nicholas Strauss QC, sitting as a Deputy High Court Judge in the Chancery Division. The judge gave his reserved judgment on 27 July 2012 and upheld the Society's claims. His order entered judgment against each defendant for £331,627.26, plus interest and with costs.
Mr Bellamy defended the claim on four grounds. The judge permitted him to appeal on one ground but he has not done so. Mr Mallett defended the claim on two grounds, one of which the judge summarised as being that 'The Society varied its contract with CTF, or behaved towards CTF in a manner which was not within what was contemplated by the guarantee, with the consequence that he was discharged from liability under it.' The judge rejected that ground but permitted Mr Mallett to appeal on it, as he has. That ground was developed before us by Jonathan Miller, who also represented Mr Mallett below. Andrew Maguire represented the Society, as he also did below.
The facts
I gratefully take these from the judge's judgment.
The Society is an industrial and provident society operating for the benefit of its members, being companies in the construction industry. It negotiates framework agreements with suppliers, with whom the members can then place orders. The Society is in effect a bulk purchaser, which enables it to enjoy substantial rebates which it passes on to its members after deducting its administration costs. The supplier delivers the goods to the premises identified by the member and invoices the Society. The Society pays the supplier and forwards copies of the invoices to members for monthly settlement by them. Thus the Society pays the suppliers and the members pay the Society.
There is no need to refer to the rules governing the Society's membership, save for (i) rule 12, specifying the period within which members must settle their accounts with the Society in respect of supplies; and (ii) rule 16, requiring members to forward to the Society audited (or at least draft) accounts within five months after the end of the member's financial year. The judge also found that there was a rule prohibiting there being more than one member from the same group of companies, but that subsidiaries or associates can, however, have separate accounts, backed by a member's guarantee; or a member can simply specify the address of such a subsidiary or associate as the delivery address for the supplies.
Whilst membership of the Society does not entitle a member to credit, in practice the Society specifies a credit limit for each member. The Society protects itself with credit insurance provided by Euler Hermes UK plc ('Euler'), the cover in respect of each member being usually equal to the member's credit limit. If a member wishes to purchase goods for amounts in excess of its credit limit, it must pay the supplier itself.
CTF's business was the supply of tools and materials to the building industry. It became a member of the Society in 2000. Its credit limit was originally £30,000. At some later date (by early 2002 at the latest), the Society obtained credit insurance from Euler in respect of CTF and its credit limit was increased to £200,000.
Mr Mallett was the CTF director dealing with financial matters and it was he who ordinarily dealt with the Society. In about November 2001, CTF's account with the Society was in arrears and the Society's inquiries revealed that 2001 had been a poor year for CTF. Christopher Hayward, the Society's Managing Director, asked Mr Mallett for guarantees from him and Mr Bellamy, but Mr Mallett refused on behalf of both.
By May 2002, CTF's position had become of greater concern: it had suffered bad debts of £70,000 and was three months late in complying with rule 16 requiring the provision of accounts (CTF's year end was 30 September). On 7 May, Mr Hayward spoke to Mr Mallett, he again asked for guarantees, and this time Mr Mallett agreed that he and Mr Bellamy would give them. On 9 May, before they were given, Euler withdrew its credit protection in respect of CTF: it was concerned that the latest audited accounts it had for CTF were for the year ended 30 September 2000. On 14 May, Mr Hayward spoke to Mr Mallett again on the telephone, who again agreed that he and Mr Bellamy would give guarantees. The judge found that Mr Hayward made it clear to Mr Mallett that they were required in order for the credit insurance to be maintained, which the Society needed if it was to continue to provide credit to CTF. Following that conversation, Mr Hayward spoke to Euler, which reinstated the credit insurance cover for CTF, and the Society continued to allow CTF its current credit limit of £200,000. Also on 14 May, Mr Hayward wrote to Mr Mallett recording that, in consideration of the Society continuing to offer credit facilities to CTF, Mr Mallett had agreed to provide the guarantees by 17 May.
The guarantee
Mr Bellamy and Mr Mallett provided the promised guarantee, a joint and several one dated 17 May 2002. It was described as a 'Personal Guarantee' and was, so far as material, in these terms:
'In consideration of your readiness to comply with our desire that you should continue membership of your Society [to CTF] …, we hereby jointly and severally guarantee the due payment to you of all sums which are now or may hereafter become owing to you by [CTF].
Our liability and the liability of each of us shall not be diminished or affected by your giving time or any indulgence to [CTF] or to any of us nor by any release, agreement not to sue, composition or arrangement of any description granted or entered into by you to or with [CTF] or to or with any of us and we shall be liable to you in respect of any obligation accrued hereunder as if we were each of us principal and not surety.
This guarantee shall be a continuing guarantee, subject to the right of any or either of us to give notice of revocation thereof … but no revocation shall in any way diminish or affect our liability to you in respect of any indebtedness of [CTF] incurred under any contract or obligation entered into between you and [CTF] prior to your receipt of such notice …'.
More facts
With the guarantee in place and the Euler cover reinstated, CTF continued to purchase goods through the Society at a discount and to enjoy a credit limit of £200,000. By the autumn of 2003, however, CTF's monthly balances were varying between about £240,000 and £280,000, which was in excess of its limit. In October 2004, Mr McCormack (the Society's accountant) notified Mr Hayward that whilst CTF's net worth had declined, its trading had so increased that a credit limit of £500,000 was required. CTF was, however, meeting the Society's benchmark for prompt payment (with no more than 10% outstanding) and the guarantees were still in force. Mr McCormack did not want to seek increased cover from Euler, in case it might cut its current cover. The result was that the Euler cover remained at £200,000 but the Society increased CTF's credit limit to £350,000.
On 11 March 2005, Euler increased its cover from £200,000 to £400,000, subject to an excess of £150,000. By this stage, CTF's credit limit was also £400,000, and CTF's account balances down to this point had generally been kept within its limit. Within 18 months, however, a Society file note of 26 September 2006 recorded that CTF was 'currently trading over the £400K limit'.
Mr Mallett resigned as a director of CTF on 13 December 2006 and left the company. Under the terms of two agreements, Mr Bellamy paid him £500,000 and the judge found that CTF was obliged to pay a further £869,000 through the redemption of shares over the next seven years. Whilst it would have been open to Mr Mallett to revoke his...
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